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Sludge is a liquid found naturally occurring in pools in the Overworld, and is created by some MFR machines such as the Harvester. It can be piped out of an MFR machine into a Sludge Boiler to create Dirt, Clay, Sand, Soul Sand and Mycelium. Currently, the only way to remove Sludge from pools in the Overworld is to use a bucket or a turtle with a bucket; the BuildCraft pump will not work.
When a player comes into contact with Sludge they will come under the effects of Wither, Weakness, and Nausea for 11 seconds. However, the timer on the effects will not run down until the player is no longer in contact with the sludge.