Rename one of the class files to bm.class according to the resolution of your texture pack (if you have something higher than 64p, let me know (tell me if you have any of MrMessiah's mods too) and I'll make a version for you) and put it in your Minecraft.jar. Extract terrain.png and open it up in Photoshop/The GIMP/anything that has transparency and follow the instructions.
If you are using HD texture fix, install the 16p one regardless of resolution
by god.. Thank you kind sir... Notch should just make this official.. I have to second the statement that he should have done so already. whether or not it is a major bug it has a huge affect on the appearance of the world.