Actually, that's a standard mixture used for deep sea diving. Helium is far less soluble in the blood than nitrogen is, especially at high pressures. (Such as you would find in deep sea diving). By replacing the nitrogen in the air mixture with helium, you can prevent nitrogen from dissolving in the blood and then 'escaping' as you rise to the surface. (A VERY painful condition known as 'The Bends'). The presence of Helium in place of Nitrogen GREATLY reduces the incidences of this painful condition.
Yes and no. Helium dissolves in blood as any other inert gas does and fast decompression with the blood saturated with helium is just as dangerous as when you breath air. AFAIK helium mixtures are used to avoid nitrogen narcosis (AKA rapture of the deep AKA inert gas narcosis) - as heliox by pros and trimix by amateurs (from what I heard due to price mostly).
As for the exploding watches, that really makes absolutely no sense. The only way that would be possible is if the watches were filled with Helium while under the water. In order to be waterproof, there has to be absolutely no way for water to seep into the watch. The only way the watches could explode would be if they were decompressed faaaaaaar lower than normal atmospheric pressures, and in that case the people wearing the watches would not fare too well. (Since the watches were filled with the gas above sea level, they would be filled to approximately normal atmospheric pressure. If the divers went far enough below sea level, then the watches could implode due to the high external pressure).
You didn't get it. Durings the month (Sep 17
th - Oct 17
th 1965) spent under 10 atm pressure helium - with its high permeability, low viscosity etc - diffunded into the watches. They were waterproof, not heliumproof
After the experiment ended and the divers were decompressing deocompression was too fast for helium to slowly leave the watches, thus they exploded - they were built to survive external pressure, not internal.
This strory is cited in the book "Nouvelles plongees sans cable" by cmd. Philippe Taillez, one of the close coworkers of Jacques Cousteau, so that's not a source that can be easily neglected. Sorry for the French title, I have the book in Polish and I suppose it will be easier to locate using the original title than the Polish one - in fact French edition has over 800 hits in google