Still a problem on the most recent version. Works fine on my Samsung Galaxy SIII as far as I can tell, but then I'm a lefty, which might explain it if @I sim's comment is anything to go by.
My son has a 7" @tab tablet, I can confirm switching to left hand mode DOES fix the problem, as suggested by I sim's kid. 🙂
Observations currently:
I don't think I've seen the issue in creative mode, but then I'm doing different things in creative, so that might explain it.
The issue could be related to looking to the NE, i.e. directly opposite from where the controls would be when in normal right-hand mode, at least that was the direction I was facing when it started occurring again just now, and returned every time I faced that direction. I was stood in a hillside dwelling, so I thought it might be related to the camera calculating the view point while in a 2 block height building and glitching. But then I went outside into the open and the problem repeated every time I looked back in the same direction.
I'll have to wait till he's in bed before he lets me run some more tests.
UPDATE Switching to left hand mode appears to be a temporary fix - it started happening again while looking almost exactly in the same direction as before. I switched back and forth between left/right hand and changed the draw distance as well, to see if that would help and eventually it was okay again.
Maybe we need to submit a save game to help debug it.
Can also confirm this is happening. Sometimes it looks like lava has "leaked" onto the grass beside the blacksmith. Other times when there is no lava leak, I assume it has been caused by flames from the blacksmith's lava well.
If you come across it quickly enough you can temporarily put it out, and fill up the lava well if you want to, but mostly you turn up to find large chunks of villages burning down.