It is a Molotov cocktail made out of a Sunset Sarsaparilla bottle, filled with a flammable substance and stuffed with a rag to ignite it. It will also turn enemies into piles of green goo if the killing blow is a Critical Hit, similar to that of plasma-based energy weapons.
The fire bomb and the Sunset Sarsaparilla bottle vary in several ways, although they are supposedly the same object. The most notable variations are the bottles' lengths and the fact that the drink's label is single and wraps all the way around, while the weapon does not. The bottle also has a different coloration than that of the drink.
Fire bombs also provide an alternative version of the Exploding Pants trick. Instead of one's target exploding (as with other explosives), they will erupt into flames and collapse. If the target is knocked down, they will simply erupt into flames on whatever they were lying on.
They can be tricky to use since, like a grenade, they do not go off on contact, so they can bounce away from the target. Also, they have a small effect radius. These two combined make them difficult to use outside of V.A.T.S.
The JSawyer mod changes the fire bombs to explode on contact