The Heal Staff is crafted using a shapeless recipe with a normal staff and one life essense. The left click function allows it to heal the target, be it a friendly, neutral, or aggressive mob. Can be very useful if you have Wolves that follow you around or a Chocobo/Horse/similar ride who has been damaged. No information is known if it works on other players on SMP.
More information on the Essences and Staves can be found on the Essences page.