Creating and using squashed file systems

SquashFS is a read-only compressed file system.

From the original documentation

SquashFS is a read-only file system that lets you compress whole file systems or single directories, write them to other devices/partitions or to ordinary files, and then mount them directly (if a device) or using a loopback device (if it is a file). The modular, compact system design of SquashFS is bliss. For archiving purposes, SquashFS gives you a lot more flexibility and performance speed than a tarball archive.

In order to create a squashed file system out of a single directory (say, /some/dir), and output it to a regular file (thus, producing a file system image), you need to say only one magic phrase:

mksquashfs /some/dir dir.sqsh

You can now use the mount command to mount it using a loopback device:

sudo mkdir /mnt/squashfs
sudo mount dir.sqsh /mnt/squashfs -t squashfs -o loop

Unmounting the squashfs:

sudo umount /mnt/squashfs

Original and complete howto here