Are you looking for "GameObject>Break Prefab Instance" in the menu?

You can use the PrefabUtility.DisconnectPrefabInstance function to do that:

http://unity3d.com/support/documentation/ScriptReference/PrefabUtility.DisconnectPrefabInstance.html

EDIT This answer is obsolete as of Unity 3.5, see accepted answer.

It's not a direct command, but if you modify the object derived from the prefab, you will be asked if you want to break the connection. You could make a small, reversible change, agree to break the prefab connection and then reverse the change. Then, if you delete the prefab, the object is no longer strictly an instance.

This works - I've tried it. However be warned that it will active gameObjects and their children. So what I did was store the list of active values for the whole hierarchy and then reapply the active values on the clone

string name = prefabedGO.name;
Transform parent = prefabedGO.transform.parent;
prefabedGO.transform.parent = null; // unparent the GO so that world transforms are preserved
GameObject unprefabedGO = (GameObject)Object.Instantiate(prefabedGO); // clears prefab link
unprefabedGO.name = prefabedGO.name;
unprefabedGO.active = prefabedGO.active;
DestroyImmediate(prefabedGO); // or this could just hide the old one .active = false;
unprefabedGO.transform.parent = parent;

Hrmmm. This is still a troublesome thing. Here's my ping to the question and a hopefully a clarification of the pain this brings. And perhaps a start on how to fix it. Imagine this... I made some an awesome prefab (pappy) that has lots of handy and complicated children (kiddos). I then copy a kiddo and paste it as a child to my new collection (newHotness). Now I am secretly screwed (trouble to silently appear later).

So I have:

pappy   (a prefab)
  kiddo1
  kiddo2
  koddo3

and

newHotness
  kiddo2
  newKid

I create a prefab out of newHotness (cause I'm like that).

Later I'm working on newHotness and I notice that I need to Apply my edits to the newHotness prefab. Sadly, I had kiddo2 selected and it applies my edits to kiddo2 back to the pappy prefab!

Whaaaaaat?!@#?!@?

I finally figure out that the prefab connection (like a sort of plague-like infection) has come along for the ride. kiddo2 never forgets who pappy was. Let's call it the "eternal inappropriate connection." What I desire more than root beer itself is a script that will let me remove the "eternal inappropriate connection" so that kiddo2 can go live his own new life as a member of the newHotness prefab. Anyone know some magic? Ultimately we need a new button next to Select, Revet, Apply, called "Unlink." For now, we make a specialized script:

[MenuItem("GameObject/Unlink Prefab")]
static void UnlinkPrefab() 
{
    foreach( GameObject g in Selection.gameObjects )
    {
       UmmmmmmLikeBreakThatPrefabLinkSomehow( g );
    }
}

Anybody have a guess for what UmmmmmmLikeBreakThatPrefabLinkSomehow() should be? -Ken =]