Creating new layer from selection in QGIS?

Is it possible to create layers from selection in QGIS?

I am using QGIS 1.7.4-Wroclaw.

To make it easier for others to see this, here are some pics. I used QGIS 2.0.1-Dufour.

SELECT

SAVE

ADD

Answer

After making a selection in a layer, right click on it and choose save selection as.

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Update for QGIS 3.2 Bonn as of 2018

As this is the accepted answer and the way of doing this has evolved somewhat, beginners might find this answer incomplete, so:

After making a selection in a layer, right click on it and choose "Export" > "Save Selected Feature As..."

which is actually just a nice redundancy, because it takes you to the same mask as clicking "Save Feature As...", but it already checks the box "Save only selected features"