For some reason, the feature is enabled by default and it starts to process your photos right after installing the software. It's pretty slow and the accuracy is far from perfect: you might see multiple clusters for the same person and different people addded to the same cluster.
If you sign in using a Google account, you can choose people from your contacts when you're asked to add names for each group of photos. There's also the option to download the name tags from Picasa Web Albums if some of your photos are stored online.
"As with Picasa Web Albums, your reward for trudging through your photos to add tags is better organization, which for a massive library of old, archived shots can be hugely helpful," thinks Josh Lowensohn, from CNet.
Another new feature in Picasa 3.5 is geotagging using Google Maps. Until now, you had to install Google Earth to add locations to your photos. The latest version of Picasa has a "places" sidebar that lets you drag photos to a map.
Three years ago, when Google acquired Neven Vision, a blog post mentioned the goal of the acquisition: improving the way you organize photos in Picasa. "It's not always easy to search through your personal photos, and it's certainly a lot harder than searching the web. Unless you take the time to label and organize all your pictures (and I'll freely admit that I don't), chances are it can be pretty hard to find that photo you just know is hidden somewhere deep inside your computer. We've been working to make Picasa (Google's free photo-organizing software) even better when it comes to searching for your own photos — to make finding them be as easy as finding stuff on the web. Luckily we've found some people who share this goal, and are excited that the Neven Vision team is now part of Google."
Update: For now, this is an English-only release, so it's not available if you set a different language for the Picasa page. Here are the direct download links for Picasa 3.5:
Windows: http://dl.google.com/picasa/picasa35-setup.exe
Mac: http://dl.google.com/photos/picasamac35.dmg