Cedar is kind of a weak wood for a solid body, but I'm sure its been done at one time or another. I've seen some beautiful cedar pieces so it would make a cool veneer.
It would probably sound like shit. Cedar is the wood that most pencils are made of. But yeah, it would smell very nice.
Depends on the piece of Cedar. Some is extremely soft and can crack easily some others are harder and more stable. It will sound just fine. I've seen tele's made out of just about EVERYTHING to prove this very point.....like this OSB tele:


Here's a cedar guitar: http://www.prairiecustomguitars.com/thecedarbuild.htm

Here's a good read regarding 'tone' woods: http://www.guitarnation.com/articles/calkin.htm