This is exciting and all -- and much as I would love to see a serious competitor to Facebook, I still don't know how I would convince any of my non-techie friends that they should switch to this. Circles? Actually I think that many people like the idea of their posts are being read by as many people as possible and not just the ones with similar interests. Although it looks like a big discussion group, the news feed…
You make a really good point about the fear / miss-conception people will have about having search tied to their profile. I really hope Google realizes that and draws a big fat line between searches and social profiles, and then makes it really apparent to their users. Making people think they're sharing their everyday searches with their social circle is enough to completely kill this before it even gets started.
People won't give this a second thought, and hopefully Google will do a good job in keeping the concepts clearly separated.