Abu Hurairah (May Allah be pleased with him) said: I heard the Messenger of Allah (PBUH) as saying: “Jews and Christians do not dye their hair, so act differently from them.”
[Al-Bukhari and Muslim]
Jabir (May Allah be pleased with him) said: Abu Quhafah, father of Abu Bakr (May Allah be pleased with them) was presented to the Messenger of Allah (PBUH) on the day of the conquest of Makkah and his head and beard were snow white. The Messenger of Allah (PBUH) said, “Change it (i.e., dye it and avoid black colour).”
[Muslim]
Commentary
Islam forbids any resemblance of its believers with the Jews and Christians. Not dying the hair will create resemblance with them. Therefore, it is necessary to color the hairs to get a perfect distinction from them. But some religious scholars have regarded this action as something desirable. Therefore, it is not mandatory to dye the hair of head and beard. The Prophet (PBUH) also advised the Muslims to dye the hair of head and beard with yellow or red colour. The second hadith points out this very fact. Abu Quhafah was the Kunyah (nick-name) of Abu Bakr’s father. His real name was Usman bin ‘Amir. He embraced Islam on the day Makkah was conquered by the Muslims. Abu Quhafah’s hair were gray, the Prophet (PBUH) ordered him to dye them but forbade him from turning them black. Thus, we learn that except for unavoidable circumstances, dying the hair of head and beard in black is prohibited.
Islamic Encyclopedia 