WordPress 2.5 uses a new password hashing scheme. Plain-old MD5 hashes are no longer used. If you share your users table with other applications or with other WordPress blogs that won’t be upgrading to 2.5 all at once, you’ll probably want to continue using MD5 hashes rather than the new hashes. We’ve created a plugin to accommodate this. With the plugin, your 2.5 blog will continue to use MD5 hashes. You should install and activate this plugin immediately after upgrading to 2.5. Users that login prior to installation of the plugin will get the new hashes, but after the plugin is active those users will be moved back to MD5 upon their next log in. If you ever want to move to the new hashes, just deactivate the plugin.
If you want to use a hash other than MD5, the plugin demonstrates how easy it is to change how passwords are hashed. Use the MD5 plugin as a template for creating your own hashing plugin.