A wolf's tail will rise and lower depending on its health. The exact health of an individual wolf can be determined by measuring the angle between its hind legs and tail. The angle indicates the percentage of health the wolf has (100 degrees for 100%, or 10 hearts; 90 degrees for 90%, etc.). Health can be restored by right-clicking a wolf with any type of meat. Rotten flesh will not induce the "hunger" potion effect on a wolf.
As of Beta 1.9 Pre-release 4, Splash Potions of healing or regeneration can be thrown at wolves to heal them.
Since wild wolves have a maximum health of 4 hearts, their tails will always remain significantly lower than those of tamed wolves, which gain 100% health (10 hearts) instantly upon being successfully tamed. Baby wolves will not gain 100% health when born. They must be fed in order to achieve max health.
Attempting to feed a tamed wolf when its health is full will start the "love mode" animation instead.
Also, as of Snapshot 12w03a, Wolves may be bred with one another through the use of meat if tamed and at full health. (Chicken (Raw or Cooked), Porkchops (Raw or Cooked), Steak/Beef, and Rotten Flesh)