I was taught at primary school that saying "bless you" when someone sneezes originated in the Middle Ages when the Black Death was decimating the population of Europe; sneezing was a symptom of the plague, so when someone sneezed you blessed them as some sort of protection from the plague.
Personally, I never say "bless you", and other than my mother, I can't think of anyone I know who does. I never say anything in response, though I guess it probably would be polite to. But then as I said, no-one ever says it to me (maybe they want me to die of the plague for having such bad manners
) so it's a non-issue in the end.