I'd bet they see in color but that's something that a biologist (who has dissected a squirrel eye) could answer better than I.
I do know that they have very good vision for motion but not much for contrast... or else their little squirrel brains ignore non-moving items. I have called squirrels and had them walk up literally between my legs as I stayed deathly still, barely daring to breathe... but boy, did they jump when I stood up!
I have found that the biggest turn-off to a squirrel is the human voice, followed by regular human strolling (not still-hunting) through the squirrel woods. As long as you're still, or moving slowly and irregularly and pausing a lot, and not making a lot of noise, squirrels pretty much ignore you.
