The way I understand it, the way you use a crab is to whack it in half, head to tail with a hatchet, then pop off a couple legs and thread the hook through the leg holes.
When I fish using clams, I tend to get a few crabs. I've never tried them for bait though. Maybe I will this summer.
As far as legality, I don't recall that they're illegal, but I should check agian.