Following is an excerpt from http://ask.yahoo.com/20060411.html
Another story veers toward the
medical. Once upon an unenlightened
time, people believed that the heart
stopped during a sneeze. A hearty "God
bless you" set the ol' ticker back in
motion. Keep in mind these were the
days before defibrillators and HMOs.
And This is what WikiAnswers.com says
There are several theories for this.
One says that the phrase "God Bless
you" originated from an Islamic
practice around more than 1400 years
ago. According to Islam religion, when
someone sneezed, he should say "All
Praises to God" and in reply to him,
on sneezing, the people would say "May
God Bless You".
Another explanation is that when
people sneezed it was thought that the
heart would skip a beat and that
instance would allow the devil to
enter the body, so saying "God bless
you" would keep the devil from
entering.
It was thought, in the middle ages,
that when one sneezed a significant
amount of breath (the breath of life)
could be expelled from the body and
thus cause death. In which case one
would go to heaven with God's
Blessing.
Written records state that the saying
goes back to the time of Pope Saint
Gregory I, or Gregory the Great, who
was Pope of the Catholic Church from 3
September 590 until he died in 604.
When Pope Gregory ascended to the
Papacy, it was just in time for the
start of the Plague, so this Pope is
unfortunately known as the patron
saint of plague. He believed that
constant repetition of litanies and
unceasing prayer for God's help and
intercession would help ward off
sickness. On 16 February 590 A.D.,
Pope Gregory decreed that whenever
someone sneezed, others should say
"God bless you" in response. The
blessing was given in the hope that
the one who sneezed wouldn't develop
the plague.
Perhaps there was more to this than
people realized: it is interesting to
note that the plague of 590 A.D.
dissipated very quickly.