This was actually on the news last year. Apparently Mexico has gotten very sticky about damaged passports etc. They advised people travelling to Mexico that your passport should be kept in a protective wallet thing and no bent pages or anything as some people were actually getting denied entry. Not worth the risk......keep it in good shape! I made a mental note after seeing that to get protectors. I always just stuffed them wherever before.
This had just happened to us. All three passports ended up in the wash. The two Canadian passports looked terrible and the US one just got a little tattered. So you know what I did - what everyone here is telling you to do. Went through the hassle and the money to replace all three. Apparently they have a microchip inside (according to the US passport guy) and if it is damaged, they can assume the the passport has been compromised and refuse entry. Not worth the risk or the stress in my opinion.