It isn’t perfect, but they’re making great progress. You can try it yourself on their test Wiki. It’s built on the open source FCKeditor, but they’ve taught it to emit Wiki markup instead of HTML. Impressively, you can toggle between WYSIWYG and Wiki markup while editing. Efforts to build a rich editor has been stymied for years by MediaWiki’s complicated markup, which includes templates and other “active” elements. They’ve taken the reasonable strategy of focusing on the 5% of markup that’s used 95% of the time and just isolating and preserving markup it can’t yet handle.
Wikia uses a project on Google Code to manage their source, building on top of the standard MediaWiki codebase. The rich editor is mostly implemented as a MediaWiki extension, but requires changes to some core files as well. It is easy and legal to migrate Wikia’s changes back into MediaWiki’s codebase, and surely someone in the community will do this as the editor approaches production quality. It won’t be long before we see it on Wikipedia and other MediaWiki-powered Wikis.