The Open Dynamics Engine have been used for some basic physics in Overgrowth for long, for the character and camera collision to be precise, but that changed recently.
Posted by Silverfisk on Mar 27th, 2009
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.
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.