I've had a lot of frustrating arguments with people about this topic. Bettas (fighting fish) can live in quite a small tank, but that doesn't mean you should keep them in one. In fact, doing so shortens their lifespan. Friends of mine kept bettas in jars with just a little gravel in the bottom. The fish had nothing to do and nowhere to hide and just floated their all day doing nothing. The only exercise they got was if a mirror was held up to the tank so they could see their refelction and flare their fins at it thinking it was another fish.
I always kept my fish (I've had four of them) in a small tank (I forget how many litres but I'd estimate it was about 40x25x25 cm) with a filter, an artificial cave and a couple of live plants. My fish swam around most of the day, in and out of the plants and the stream of bubbles and sometimes rested on the plants or in the cave. They all lived for two to three years after I got them, despite people telling me that bettas "only live for a year" and grew bigger than my friends' fish. Despite them obviously being happy and healthy I wish I had a dollar for every time somebody told me I was doing everything wrong and that my tank was too big (obviously the fish was happy in it, so no it wasn't), that it didn't need a filter (it helped keep the water clean so I didn't have to do water changes as often, and although bettas can live in unfiltered water breathing with their Labyrinth organ they do better with a filter) etc. etc.
I think pet shops push the idea of keeping bettas in very small tanks or jars because it's a much easier sale if you think you don't need as much space or a filter. People are less likely to buy one if they know they have to go to a little more trouble. I wish pet shops wouldn't do this because it bothers me when people treat animals as decorations rather than living creatures. People buy the animals in good faith and just get given dodgy information. It's a good idea to do your own research about this stuff before you get a pet.
Sometimes they do even worse things like sell them in sealed vases as a table decoration (with no way to put food in, telling people they will live off the plant in the vase, which they can't because they are carnivores) or sealed in a plastic keyring. There was even an iPod accessory a while back which was a tiny tank to put a live fish in but those were pulled from sale pretty quickly due to public outcry (do a google image search for "iPond")
This forum has some great info on how to properly care for bettas.
There is also some good info here debunking the idea that wild bettas live in "small mud puddles"
This has some great info on different setups for housing bettas, including tips like making sure you have a lid so they don't jump out.
We got a small tank and two fish and they died within months. It turns out that the ammonia in their urine in a tank that size burnt them and changing the water regularly meant that their water didn't have the healthy bacteria they need in it. It's been almost two years since then and I still feel horrible guilt. They were such beautiful fish! I would love to get some more but I won't do it until we can get a proper sized tank.