When I catch fish, I generally eat them. If I've already caught my limit or if I'm in a situation where it isn't practical to keep them for some other reason, sometimes I'll catch and release just for fun, and to keep my skills sharp for the real thing. If I catch a fish that's too small to eat, I'll let it go.
So, a few thoughts about catch and release from someone who actually does it. All respect to Colin, anybody who uses a dry rag to hold the rish, uses a "huge iron hook," or rips out a chunk of flesh when they remove same, isn't doing it right; either you're committing a bit of a straw-man, or Aussies don't know how to catch and release.
Around here it's a big no-no to catch and release when the water's warm (low O2 content stresses the fish); so is handling a fish with dry hands, not to mention a dry cloth! What kind of moron does that???
It is standard procedure to remove the hook with needle nose pliers or forceps to minimize damage, and if you do it right the fish is out of water for several seconds, not several minutes.
I only C&R with artificial flies, which poke a tiny hole in the corner of the mouth and which I strongly suspect the fish forgets about very quickly (though admittedly I've never actually asked them, and I doubt they'd give me an honest answer if I did). If the fish is hooked badly and injured, I whack it on the head and take it home for supper. I think that, among fly fishermen at least, this is pretty much how it's done all over the world.
Why do people catch and release? To keep skills sharp for the real thing, as I said. With most game species, it's the only way to observe them close-up. The colors of a spawning brookie bring me such a sense of wonder and awe that to me it's worth putting the poor guy through some momentary stress. And may the critters forgive me, but catching them is extremely fun.
Is it cruel? Well, the fish don't seem to be having fun, and I generally am. On the other hand, no lasting harm is done if it's done right, and usually even if it's done wrong. That's a fact, backed by lots of scientific research (the Game and Fish Department cares about that sort of thing, and they do the research). Human interactions with animals are fraught with such questions. Is it cruel to eat meat and eggs from industrial "farms"? Go to a rodeo? Keep fish in a little glass box? Domesticate wolves and require one of their offspring to lay here beside my chair with an adorable little bandana around his neck? These are questions we all must ask ourselves, and generally the answers are as nuanced as the person asking and the critter affected. We do the best we can.