Data URIs are one of the best techniques in CSS, allowing developers to avoid referencing external images and instead embed them directly into a stylesheet. The main advantage of this approach is to save HTTP requests.
HTTP requests are a huge performance bottleneck, and the reason techniques such as CSS image sprites have been popular for some time. Basically, if you can avoid requesting an extra file, not only does it save your server the work of looking up the file, but it also saves your user the download time. In fact, HTTP request management is so important, that it is the top issue in the Yahoo Performance Rules.
via Jon Raasch’s Blog – CSS Data URIs: Use Them In All Browsers Now!. Excellent post on how to use Data URI’s in all browsers down to IE7/6.