Apple has just released a Java for OS X 2012-003 security update and this one takes care of the Flashback malware issue.
This Java security update removes the most common variants of the Flashback malware.
This update also configures the Java web plug-in to disable the automatic execution of Java applets. Users may re-enable automatic execution of Java applets using the Java Preferences application. If the Java web plug-in detects that no applets have been run for an extended period of time it will again disable Java applets.
This update is recommended for all Mac users with Java installed.
For details about this update see: http://support.apple.com/kb/HT5242
You really should update immediately if you have Java running on your Mac.