There is a great post on webmasterworld about FavIcon. It covers in good detail the background, uses and some really useful links.
FavIcon (short for Favourites Icon) also known as page icon is associated with a particular website or webpage. A web designer can create such an icon, and many graphical web browsers utilize them. Browsers that support favicons may display them in the browser’s URL bar, next to the site’s name in lists of bookmarks, and next to the page’s title in a tabbed document interface.
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