The vulnerability, discovered and documented by researcher Feross Aboukhadijeh, is a variation of the clickjacking technique and could be used to turn on a webcam and microphone direct from a web site without the user's knowledge or consent.
In this video, Aboukhadijeh documents the attack scenario:
Adobe says the issue is now fixed:
Adobe is aware of a report describing a clickjacking issue related to the online Flash Player Settings Manager. We have resolved the issue with a change to the Flash Player Settings Manager SWF file hosted on the Adobe website. No user action or Flash Player product update are required.
If, like me, you are paranoid about these kinds of bugs activating your webcam, do the smart thing and put a sticky over the camera. Matter solved.