You have come upon the energetic field of the body - as in Chi or Prana. It is the basis or platform for jhana as described in the Suttas.
Ive suffered a lot in the past year in my practice, and have been quite depressed. I had a very strong fear of insanity etc. But thankfully it seems that these fears have all gone, though i wouldn't say i was totally happy now, just no fear. But my emotions are up and down and i a bit confused. One moment i feel totally peaceful and then i dip back into an intense sadness.
This is common at this phase. From an energetic stand point you are releasing lots of junk (blockages) and these create the up and down emotional roller-coaster. If it gets too much for you, then back-off on the practice but I think once you develop some skill with this energy it won't be such a problem.
Ive been trying to observe my whole body when i can, and this is becoming more and more possible for longer periods. Should i be doing this?
This is what I recommend. Keep your awareness spread throughout the whole body. One good way of doing this is to imagine that the energy is going in and out through the pores of your skin as you breath. If there are tight or dead areas then imagine the energy coming into those areas and opening them up. If areas are really intense then imagine that spreading out or put more attention else where. Allow the mind to incline towards and rest with the pleasant qualities of this experience that you have already noticed.
You have not gone off track. You are doing very well. Here are some links to teachers that work with this stuff:
Thanissaro Bhikkhu - A western monk based near San Diego, CA in the Thai Forest Tradition. Many short dharma talks on all aspects of what you are experiencing and how this is worked with in this tradition. Here are two short talks that should give you all kinds of ideas on how to work with this stuff:
http://www.dhammatalks.org/Archive/100323%20Perceptions%20of%20the%20Breath.mp3http://www.dhammatalks.org/Archive/100227%20Fabrication%20at%20the%20Breath.mp3Shinzen Young - go through his site and read what interests you. Scan through his videos on youtube. There are lots of good tips and techniques for you on his site.
Shinzen Young takes a more vipassana like approach where as Thanissaro Bhikkhu takes a Sutta approach but they are working with the same phenomena.
Have fun!