Literal directives can now contain interpolation tags. These tags will be evaluated only once at compile time. An example usage is conditionally decide which component to instantiate with v-component="{{type}}". Doc.
Attributes listed in the paramAttributes option now accept mustache interpolations too. They will also only be evaluated once.
v-repeat now accepts an argument which will be used as the identifier for the wrapped object. This allows more explicit property access in repeaters. Doc.
Added v-view directive which binds to a string value and dynamically instantiate different components using that string as the component ID. Doc.
Added filterBy and orderBy filters for v-repeat. Doc.
Custom filters that access properties on its this context will be considered computed filters. Doc.
You can now access the event in v-on handler expressions as $event. Example: <a v-on="click:handle('hello', $event)">Hello</a>
Interpolation delimiters can now be customized via the delimiters global config option. Example: Vue.config({ delimiters: ["[", "]"] }) will change the matched interpolation tags to [[ ]] for text bindings and [[[ ]]] for html bindings.

{{>yield}} syntax has been deprecated. A Web Components spec compatible content insertion mechanism using <content> elements has been introduced. Doc.
To use a component as a custom element, the component ID must now contain a hyphen (-). This is consistent with the current custom element spec draft.
v-repeat Arrays' augmented methods have been renamed from set to $set(index, value) and remove to $remove(index | value). The prefix better differentiates them from native methods. The replace method has been removed.
When iterating over an Object with v-repeat, the object no longer gets a $repeater array. Instead, the object is now augmented with two methods: $add(key, value) and $delete(key), which will trigger corresponding view updates.
v-if now creates and destroys a child ViewModel instance when the binding value changes, instead of simply removing/inserting the DOM node. In addition, it can no longer be used with v-repeat. Use v-show or the new built-in array filters instead.
v-with can no longer be used alone. It now must be used with either v-component or v-view. v-component can also be used as an empty directive just to create a child VM using the default Vue constructor.
Production build now strips all warnings and debug logs. To leverage debug: true, use the development version. The development version now has more detailed warning messages.

event.stopPropagation() and event.preventDefault() inside v-on handlers now work as expected.
parent option now works properly when used in Vue.extend
Mustache bindings inside <textarea> are now properly interpolated before being set as value.

v-component, v-with and v-if have been re-written for a cleaner compile flow.
v-repeat has been re-written to use refined diff algorithm which triggers minimum DOM manipulations when the array is set to a different instance containing overlapping elements. This makes it efficient to pipe an Array through filters.
template option now directly clones native <template>'s content when available.
Overall performance improvements for both initialization and rendering.