Firebombs were introduced sometime during the easter of 2003 as none other then an "easter egg"
As with most new items players tried to sell fire bombs as rares. But word spread quickly and within a few days it was common knowledge what these items were and how to make them. Just take a regular oil cloth (which can be crafted by a tinkerer) and use it on a bottle of liquor to make a fire bomb. You can then double-click the fire bomb and toss it like an explosion potion. It creates a one tile fire field which lasts about 8 seconds. This fire field does damage like a normal fire field (and can get you guard whacked in trammel if you use it in town and a blue npc walks over it). If you hold the fire bomb in your hand while it explodes it does about 6-10 points damage (unarmored).
The following items can be made into firebombs. You need to fill them with liquor first, then use an oil cloth on them. They are: bottle of liquor, goblet, pewter mug, glass pitcher, and glasses.
Theoretically you could make anything into a fire bomb as long as it can hold liquor. But be careful trying this on valuable items, because these items will explode and be destroyed if double-clicked.