Even before 1.2, this was fixed so that blocks no longer take the space of water. They simply 'hold' the water. This means you can no longer eliminate pools of water by burying them, which means more work for Hellivator Diggers.
What you can do is create a side-shaft to drain the water into. If you're dealing with a large pool, you may want to build walls on either side to block out most of the water. Then, just build a shaft long enough to contain the rest of the water and let it flow in. Wall it up and keep digging your downward shaft.
If it's a relatively shallow pool though, just dig a trench near the bottom to drain it away from your shaft, then continue construction.
As a side-note for future developmentDo not forget about this water though, youas it will eventually run into LAVAbe VERY useful later for getting through Lava. Pouring your pools of water over it will form obsidian, which is even more difficultyou can then mine out to deal withcontinue your shaft downward. However, the principle is mostly the same, but for safety, you will You may even want to have it follow you down to dig around the pool and dig out your trench beforehandbottom, then dig to the other side of your trenchdigging out occasional air pockets so that you can safely break it open and drain the lava in(though ifyour giant pool of water will be available immediately when you have a lavaskin potion, it becomes easier to use the previous method)reach Lava levels.