_aD

OK this is very odd. We weren't near water - we were in a cave. I've just noticed I have five ink sacs in my inventory, so clearly some squid died somewhere, somehow, as it crashed. I had only checked my inventory a minute or two ago and there were no ink sacs in it. No idea where they came from, though!

Had this exact error on a vanilla SMP 13w39a but whilst both players were placing torches. No other players and no squids around.

Breeding now works as expected. It may have been a temporary server problem (it has been restarted since my comment). I will create a crash dump as asked if it happens again.

Confirmed on Minecraft 1.6.2 on a vanilla SMP server with no mods for client or server. Windows 7 x64 Java 64-bit 7 update 25.

Two horses, both adults. Confirmed as I can saddle them.
They are definitely horses, not mules or donkeys. Confirmed as they can only be equipped with saddles or horse armor.

Horses are not tethered. Horses are not in a position where they are jostled by other animals, players or on impassable terrain.

Put two golden carrots in quick slot.
Right-click once on each horse. Zero golden carrots left in quick slot.
Both horses show hearts. Neither horse interacts, despite walking next to each other closely.

Once love mode finishes, repeat with golden apples.

Tried with and without saddles, with and without leashing to a player or a post.
My girlfriend also tried and could not get them to breed. Maybe it's because our cow, Stal, is watching?

I find the same symptoms when launching a crafted firework using a dispenser.