I'm trying to figure out how tunnel, both horizontally and vertically, through large bodies of water — preferably a method which can be used early in the game and which can be done with on-hand materials rather than a lot of setup.
In earlier versions of the game, water was permanently destroyed by blocks placed in it, allowing tunnels to be easily created by placing blocks, then hollowing them out. As of Terraria 1.1, however, blocks seem to "store" the water they were placed in, which is then released when they are mined. The official wiki doesn't yet describe any techniques for dealing with this change.
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Update: Sadly, this method no longer seems to work in recent versions of Terraria. Mannequins break instantly when lava makes contact with them. Statues survive the lava, but when water contacts it, obsidian is now created which displaces the statue.
Original answer: Okay, I've been poking it for a while, and have come up with a way to destroy any amount of water with just two items! This method does require you either tunnel around to get underneath the body of water you want to drain or stand in it while working, but it's still often faster than the old fill/dig method.
All you need is a mannequin (possibly other furniture as well, but something 2 blocks wide worked best in my tests) and a bucket of lava:
Sadly, you can't reverse the process to destroy large amounts of lava — the lava will happily hover above the water, never making contact, forming obsidian, or being destroyed. Worse, attempting to pick up this glitch lava will destroy your bucket!
1 The water vanishes because, when falling into lava, it should make obsidian. However, the mannequin prevents the obsidian from being formed (as they would occupy the same space) and the water is simply removed because it has no place to pool.
2 If you aren't close enough to your mannequin chamber before breaking this block, the mannequin may fall in the lava and be destroyed. Bring spares!