Although it was not always necessary, currently (as of January 2012), yes it is necessary. UNLESS you are a frequent traveller or live in a contiguous border state, then there are special ID cards issued which can take the place of a US Passport.
Yes, you will need to catch a plane to go to Cabo San Lucas if you live in Australia. You can't do it by car, because there is water between Cabo San Lucas and Australia.
Yes, you need a valid passport for a flight to Mexico.
Yes, babies need a passport to travel to Mexico.
Yes, children need a passport to travel to Mexico.
Yes, infants need a passport to travel to Mexico.
Yes, children need a passport to fly to Mexico.
Yes, children need a passport to travel to Mexico.
Yes, minors need a passport to fly to Mexico.
Yes, minors need a passport to travel to Mexico.
Yes, you need a Mexican passport to travel to Mexico.
Yes, you do not need a passport to fly within Mexico if you are a Mexican citizen. However, if you are a foreigner, you will need a valid passport to travel within Mexico.
Yes, you need a valid passport to travel to Mazatlan, Mexico.