Be warned: Censored examples are below.

The site 2600.com is compiling a list of words that Google Instant censors. They call it "Google Blacklist". It says that even if your query isn't blacklisted that you do not get the same results from Google Instant as you do from an explicit Google web search. They are also compiling a list of words they suspected would be censored, but were uncensored.

http://www.2600.com/googleblacklist/

You can send them your discoveries to add to their lists. blacklist2600.com

Here are some examples with some annotations. The capital letter indicates where the blacklisting begins.

[marijuanA] was originally in the uncensored list, but is now blacklisted.
I wonder if Google is using the 2600 uncensored list to update their blacklist?

[dick], which is a common first name.
[google is Evil] or [hitler is Evil] or [anything is Evil]. An interesting side effect is that after typing [hitler is] the only suggestion remaining is [hitler is god].
[snowballIng] is what might be happening to the size of this list.
[teeN]
[twinkIe]: I wonder if you can request this in the Googleplex dining room?

other coverage:
slashdot: http://yro.slashdot.org/article.pl?sid=10/09/29/0526215
valleywag: http://valleywag.gawker.com/5649635/the-definitive-list-of-words-google-thinks-are-naughty

Also see: http://googlesystem.blogspot.com/2010/09/google-suggest-filtering.html

<< Google Suggest was supposed to help users type a query by providing useful suggestions. Unfortunately, some of the suggestions are offensive and Google had to filter the searches related to pornography, violence, and hate speech.

Google's over-protective algorithms now filter all the suggestions that include "is evil", "I hate", "[ethnic group] are" (for example, "chinese are"). Google Suggest also filters "Smells Like Teen Spirit", the name of a popular Nirvana song. >>

1. It can hardly be called censorship to require a single extra press of the Enter key to see a search result.

2. It would make sense for Google to link this to a user's "Safe Search" preference. Any user who has Safe Search turned off can cope with searches designated by others to be "offensive".

3. Looking at the 2600.com list, I think it's unlikely that the search terms are hand-compiled. My guess is that the list of search terms (and the widely-varying number of letters at which the behavior changes) is computed from some broader list (e.g. the Safe Search list) by working out at what point something deemed to be "offensive" would be displayed. If my guess is right, this list will be quite fluid and frequently-changing over time.