Laboring in water is becoming more popular because the water can be extremely soothing during labor, and can slow down contractions and act as a pain reliever. Some childbirth education classes go as far as to describe laboring immersed in water as an "aquadural". Never had an epidural myself, I would not be able to say whether water is as effective but my modest guess would be a firm no. I did, however, spend some of my labor with my second child in my bath tub. It was kind of nice, and did help with the pain of contractions. Being immersed in water also makes the body more weightless, making it easier for women to move their end-of-pregnancy body around into different positions, without having an aching body the next morning.
Many women who labored or delivered their babies in water report feeling relaxed and energetic throughout their births. During the actual delivery, water is said to help the tissues stretch and make tearing less likely. Some also claim that water birth provides a more gentle transition from womb to earth for a baby. And the risks? It's not at all uncommon for women to have a sudden involuntary bowel movement while pushing. This is nothing to be ashamed of, but it would turn your birth pool into a less than hygienic environment.
Opponents of water birth warn that the baby could drown if not immediately taken out of the water, especially when there is a big difference in the temperature of the pool water and that of the uterus. By all means, labor in water, but do some more research if you are hoping to push your baby out into a birth tub. You might also be interested in reading: What does labor feel like?