I like the game Gish for its squishy physics play. I also like Half-life 2 (but not just for its physics, though they are fun too)
I just found N – the ninja game – basically Loderunner with physics. Frustrating and funny. Download and just watch the game play itself. See the ninja get chased by heat-seeking missiles, sliced by lasers, blown up by mines, with full conservation of momentum and gravity applied to the fried and exploded little bits of ninja.
Edge magazine also recommended this little gem: The Tower of Goo. You have to build a tower out of goo-balls. The goo balls form semi-rigid struts as you drag them around. Overbalance your tower and the rubbery structure slowly starts to topple, at which point you start to try to counterweight it to right it. Eventually the whole thing topples too far. There is no penalty though – you can just keep building on top of the ruins. The sounds the little goo-balls make as you drop them in place make the experience that much more fun. It reinforces the action, gives you immediate feedback – a core component in a pleasurable experience.