I was speaking to my sister this morning and asked if she'd look up substituting white wine for vermouth for me and she said she'd found a FAQ which said it was fine to do so. Because of the magic of GoogleTalk, we were actually talking so I heard her pronounce it "fack". My former boss also pronounced FAQ in this way but I always say the individual letters. I then asked my sister if many people said it as one word and she said they did.
The reason that I don't say it as "fack" is not rooted in prudishness related to the similarity of that pronunciation and another more vulgar word but rather due to an experience I had at my former job to which that pronunciation is forever linked.
Part of my work at that time was conducting 5-minute conversations with up to 32 students a day. Most of the students were freshman employees or college students who were going to be freshman employees in about 4 or 5 months. All of the students I dealt with were being given the program as corporate training.
As you might imagine, the vast majority of the students were young males and thus were hormonally-challenged. Because of this, they have a tendency to be pretty immature around women. One of these fellows got it into his head that he was going to use his access to a gaijin female to make an obscene phone call in English. Unfortunately for him, he suffered the same "u" and "a" pronunciation issues that many Japanese students have. I answered the phone and he uttered a breathy, "fack, fack, fack". It was all I could do not to laugh (which might encourage him).
I will forever associate FAQ pronounced as one word with that incompetent obscene phone caller and smile.
On a related note, one of my fellow teachers when I worked at Nova, told me of another "a"/"u" pronunciation problem. He said his student asserted something and then said, "it's f*cked". He asked her to repeat several times because he couldn't believe she meant what she said. Eventually, he figured out she was trying to say "it's fact."