I haven't been into 40k for all that long, so this is the first time I've heard of squats. Whoever they were, they look pretty epic, they should totally be back on the table.
Squats are basically dwarves in the 40k setting. They were a major faction in the early game, but after the grimdarkening set in the Squats suddenly disappeared from the canon for awhile before finally being referenced as having all been eaten by the Tyranids at some point. Now even mentioning them offhandedly gets you instabanned on the GamesWorkshop forums.
Squats are mutated humans (abhumans in imperial teminology) who lived on hazardous extreme worlds with high gravity. In epic they used land trains and armored zeppelins, as well as infamous hordes of trikers. According to GW most of their worlds were devoured by a Tyranid swarm, but there seem to be connections to the Demiurg in Gothic.
Squats were analogous to dwarves from Warhammer Fantasy. The race was dropped after quite a while for one reason or the other. They've still got a load of fans in the older parts of the 40K-community though.