Sheep in Minecraft are versatile companions that provide resources such as wool, which can be used to create beds, carpets, and banners. They can be found in various biomes, including plains, forests, savannas, mountains, and meadows, typically spawning in groups of 2 to 4 and being most active during daylight. Players can interact with sheep by shearing them for wool, dyeing their wool by using different dyes, and breeding them with wheat to produce offspring that inherit the color of one or both parents.