Mushroom Grass Seeds are a farming item that can be planted to grow Glowing Mushrooms, just like Grass Seeds can be planted to grow Regular Mushrooms, though the glowing grass grows significantly slower than regular grass. If mushroom grass is hit with a pickaxe, the grass growing on the mud block will disappear.
Mushroom Grass Seeds can be harvested from both the smaller grown mushrooms and the tall, tree-like mushrooms, though they are an uncommon find.
To grow a farm from Mushroom Grass Seeds, they will have to be planted on mud. Once a seed is placed on a mud block it can spread to other connecting Mud blocks at a slow rate.
As of 1.2 patch, surface Mushroom Biomes can be created and used to provide suitable housing for the Truffle NPC.
In the Console Version of Terraria, Mushroom Grass Seeds can be used to make Purple Thread