In the latest Alpha you can press 'B' to spawn blocks with physics (powered by ODE) and then use right click to drag the blocks around.
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The music in the video is a new track by Mikko Tarmia, listen to some more music at Overgrowth's Facebook profile.
Soon Wolfire will start working on a physics editor where you'll be able to attatch a model to a set of physics primitives with various constraints to give them physical properties. This means weapons with physics, scenery with physics and ragdolls.