Makes changing settings faster. At least that's what I felt back then when I used my Canon 20D. i.e. when shooting AF, and I suddenly want to MF, just push the tab and MF away.
Aye. The hardware button overrides the settings on the camera body. At least that's what happens on the Canon and even on my Olympus when I used the Sigma 30mm.
Just to confuse matters even more you can get lenses with full time manual focus (or thats what its called for Canon - not sure if its a generic term!) which means that even when its in AF mode you can still turn the focus ring as if its in MF.