Sheep can be used for meat, hides and for wool. They follow the player when shown grain (all grains except rice), or when leashed with rope. When the animal has been familiarized, using a knife or shears on it will cut its wool, which can then be picked up. The wool will regrow when the sheep eats grass. Meat from a sheep is called mutton. Hides from sheep are covered in wool, and can be removed by combining a knife and the hide in the crafting grid.
Sheep will spawn in mountain biomes with temperatures between -10 and 25, rainfall over 250 and evapotranspiration (EVT) less than 0.75. They also spawn in boreal forest climates, in any biome. These have a temperature between -20 to 0, and rainfall over 250.
Breeding sheep can only be done once familiarity with the animal is established. This can be viewed by holding down shift, and looking directly at the animal. A small heart will show above it, indicating the level of familiarity.