Alright, time to weigh in here.
What Americans today call "damascus" steel is simply pattern-welded steel. I'll talk about "true damascus" in a minute. First, the history lesson.
Pattern Welding is as old as steelmaking itself. In antiquity (think 1000+ BC) you made yourself a furnace, fed it charcoal and ore, and you got what's called a Bloom at the end. During the process, the ore cooks down through the charcoal, picking up some carbon along the way from the carbon monoxide, and sintering together into nuggets mixed in with the flux and unburnt fuel. To turn this into a usable material, you then heat it up and consolidate it, which is to hammer it softly to make a solid mass. Then you fold it, stack it, weld it again, until you have a bar of steel. Because there's as much art to science in this process, some nuggets will have more carbon than others, but the "folding" that goes on results in carbon migration rather quickly. In the old days, folding your steel was not anything special, but how you produces an ingot with relatively homogenous carbon content and distributed impurities. This way there wouldn't be hard spots and weak spots, as there would be with lesser refinement.
Here's some pics of a recent smelting operation I attended.
A smelting furnace in operation:
Opening the furnace to get the bloom:
The cooled bloom... the round bits are glassy slag, the chunky parts are hiding the high-carbon nuggets:
Slowly working the bloom down on a power hammer:
Some "product" - this stuff needs to be welded and folded about 5 more times before you have a bar of steel appropriate for a knife:
Eventually, people started figuring out that different grades of steel etched into slightly different colors, and that you could manipulate them into neat designs. Take the Viking-age Sutton Hoo find as an example... here's a reproduction of it.
RogueWarrior, nobody would fold steel 512 times. If you start with two pieces of steel, and fold 8 times, you get 512 layers. I suspect this is what was going on in what you heard. Folding 512 times would produce what my calculator calls 1.340780792994259709957402499e+154 layers. You'd never see the pattern, and you'd likely not have any steel left at the end of the process (where do you think all that hammer scale comes from?).
True Damascus
When European Crusaders made their way down to Syria, they ran into locals whose swords were better than theirs. The blades had a watered appearance, that is to say, they had a three dimensional quality to their surface despite being smooth - similar to some fine pattern welded steel to the untrained eye. Being in Damascus Syria, this new material gained the name "damascus steel". In truth, it was Wootz - a crucible steel made in India (not exclusively, but in this case, yes, and they were the best at it). Wootz is made by adding cast iron (high carbon, but "chunky") and pure iron, along with some key impurities like vanadium, phosphorous, and a few other trace elements likely native to the ore they were using. Put all these in a crucible (fire-proof jar) and cap with green glass to prevent oxidization during the melt, and fire for a day at 3000 degrees. This melts all the material in the crucible. Rather than go after these superhot jars, they simply let the fire go out and came back a day or so later. What happens then, is while allowed to cool at a very slow rate, the impurities in this mixture form "seeds" for crystal growth, much like ice crystals do on a car window in winter time. As the solution cooled to the solid point, you got a nice matrix of dendritic crystalization that the lower melting point material then cooled around, providing a good cutting/yet tough material. The key to wootz, and the cause of its rarity and expense, is that it can only be forged to shape within very tight temperature tolerances. Too cold, it won't budge and can crack if you hit it too hard. Too hot, and the crystaline structure you just worked so hard to get dissolves back into solution with the rest of it.
Ric Furrer in Wisconsin has figured out how to do this with regular success. Here is one of the ingots he made at a recent hammer-in:
the green on top is the green glass that hasn't spalled off yet. You can see the crystal structure on the surface.
Here is a knife that Tai Goo of Arizona forged from Ric's wootz:
Here you can see the fine pattern in the steel:
Cable "damascus" and other variations
Bladesmiths today will recycle anything. Steel cable being one of them, since the strands are of appropriate carbon content for a knife, and the pattern you get when welding cable into a solid ingot is pleasing to the eye. Care must be taken to get all the goop out, since these cables are most often industrial in nature, and have worked years of grease and dirt into the crevaces, all of which will present problems when trying to get a good weld in the forge.
Here's one example:
And another, more complex variation:
Bladesmiths have been known to use wrought iron, metoric iron, bed frame rails, rusty nails, beer bottle caps, and lordy knows what else to get an interesting pattern in their pattern-welded blades. Always, though, when using interesting but low-carbon steel for the pattern, they'll often insert a bit of high carbon steel for the edge. The japanese called this San Mai. Think of it as a taco, where the stuff sticking up out of the top is the cutting edge and the interesting looking things are the shell wrapped around it.
Modern "Damascus" blades
Nothing more than factory produced pattern welded steel, today's damascus offers knife collectors aesthetically beautiful knives. There is nothing magic about it though, and often times a bar of 1095 or 52100 will make a far superior cutting blade than anything welded together. If you're buying damascus today from a knife shop or factory maker, you're buying it because of how it looks, not how it operates. Common wisdom among bladesmiths holds that carbon diffusion in a thin section (like knives) will even out the carbon content in steel after about the 4th or 5th fold. The light/dark patterns come from the other alloying elements like chromium, manganese, vanadium, nickel brightening up one steel, and leaving the other more plain (just iron and carbon, which shows darker after an etch). Sometimes even stainless steels are used, which I personally abhor and find inappropriate in a good knife.
The mechanical properties of a modern damascus blade are different than blades made from one steel, in that weakness between the layers will create micro-serrations that improve the "sawing" capabilities of a blade, but leave the actual edge geometry less sharp. A good test for any blade, homogenous or damascus, is the ABS (American Bladesmith Society) Journeyman Test. To reach this level, bladesmiths must make a knife no longer than 10 inches from guard to tip, and no deeper than 2 inches from edge to back, that will perform the following tasks, in order: Shave hair, cut through a free-hanging 1 inch hemp rope, chop through two 2x4s (one at a time), shave hair again, then survive a bend in a vise to 90 degrees without breaking. Any good knife should be able to pass this test. Modern damascus will tend to fail more often, because of the micro-serration issue, as well as inherent weakness in a "fabricated" ingot of steel in the bend test. Most users, though don't put their knives through these conditions, and the damascus buck knife will likely be put through duty like any other buck knife - cutting small rope, whittling, occasional camp chore or worksite duties. For this, the damascus blade will likely do, but will suffer abuse to the surface pattern.
Reconditioning a modern damascus blade is usually as simple as sanding down the damage through progressive grits, starting at 100 and going down to 2000. This will "erase" the pattern, but fear not - it's usually easy to reclaim. I have successfully used apple cider vinegar to bring out a nice etch. Others use Ferric Chloride, available as circuit board etchant from Radio Shack, watered down 2:1. Some use bluing chemicals, others use salt treatments. The cool part is that if you want a different finish on your damascus blade, you can experiment, sand down a little, and experiment again until you find a treatment you like.
Care of any carbon steel blade (not stainless) includes keeping clean, free of excessive moisture (like leather sheaths - those withhold far too much humidity for low-alloy carbon steel) and a light coat of oil. If you prepare food with this knife, you'll want to use a food-safe or tasty oil. I spray mine with Pam and wipe clean. If it is purely for industrial use, I reccomend a fine crystaline wax (Rennasaince Wax, available at most woodworking shops) rubbed into the steel, and wiped down.
Hopefully this gives you a better understanding of what we're working with here, as well as dispelling a couple damascus-myths.