A very interesting game.
The good:
The fire and water concept is nice.
I like the way that you should avoid combat, it makes the enemies more like components in a puzzle rather than just things to kill.
The graphics are fine.
The auto hiding in grass is a nice feature. I like being able to walk past enemies like that.
The not as good:
The tile set is very repetitive. It could do with some different kinds of blocks, maybe some that can be destroyed...? In any case,something to make the game visually appealing even after 10 minutes.
It could do with some different scale bitmaps for representing the smoke and fire. Just scaling up a low res smoke bitmap makes it ugly and blocky.
If you're using WASD for movement how about making W Jump, and then you can save Space for another function later?
On that subject, how about key mapping? People from other countries don't always use WASD (
http://en.wikipedia.org/wiki/AZERTY)
Personal opinion:
It's a little strange using the mouse and keyboard together, it seems like it doesn't really matter here you capture the fire or water from, just the nearest Line Of Sight square with that feature could be grabbed automatically using a key.
As for throwing the fire or water.. It feels like it would be better if the game tried to calculate the angle
in order to throw to the currently selected/moused over square. It's strange to see a square highlighted but when you throw it falls far short. Either that or don't highlight squares when holding fire/water but instead bring up a crosshair or something near the character to show the current arc. Then it wouldn't feel like the fire is falling short.