This thesis describes the observation of a novel optical non-linearity mediated by the dipole-dipole interactions in a cold gas of Rydberg atoms. Electromagnetically induced transparency (EIT) is used to map the strong dipolar interactions onto an optical transition, resulting in a cooperative effect where the optical response of a single atom is modified by the surrounding atoms due to dipole blockade. This optical non-linearity is characterised as a function of probe power and density for both attractive and repulsive interactions, demonstrating a non-linear density dependence associated with cooperativity. For the case of repulsive interactions, excellent agreement is obtained at low densities between experimental data and an interacting three-atom model. The ability to tune the interactions with an external field is also verified. This cooperative effect can be used to manipulate light at the single photon level, which is relevant for applications in quantum information processing. A theoretical model is developed to show that the non-linearity can be used to obtain a highly correlated single-photon output from a coherent laser field interacting with a single blockade region. Progress towards observing this experimentally is described, including details of the construction of a new apparatus capable of confining atoms to within a blockade radius.