When my thief tries to hide in shadows, the button (on the bottom of the screen) turns red, but I have to wait about 20 seconds for him to actually attempt it. Is this a bug and if so, how do I fix it?

The game runs in real time, but is based on turn-based rules.
You have to wait for the start of the next turn.
However, this should not take 20 seconds.
A turn (combat round) should last 6 seconds, but I've noticed that it can take up to 10 secs.

Edit: What sort of system are you running?
There are a lot of options in the config program that can offer gameplay - performance trade offs. changing some of these may speed up the game for you.

Yes I know its a turn based game, I've very familiar with the infinity engine and AD&D rules.
At first I thought it was because of the round thing, but I realized it should not take 20 seconds, and definitely not that long when not in combat. I have windows 7 with all the settings as high as they can go, I do not have a performance issue. Saving and reloading seems to get rid of the issue, albeit only temporarily.

I have this problem too. Sometimes the hide is instanteous, but usually it takes 6-20 seconds to hide (sometimes I have the feeling it's more than 20s). I tried messing around with settings, but nothing helped :\

Hide success isn't guaranteed, so I wonder if perhaps the delay is due to failing the attempt for a few rounds before the character succeeds. Only thing I can think of to explain it.

Well, that's kind of what I was getting at as well: the lighting could be affecting (I was just wrapping that possibility into a failed roll as well). Like I said, it's all I could think of and it could be way off. I wonder if anyone's experimented with it in areas with different light levels to see if it works faster/better in low light?

If it's a fail its shown on the bottom, knowing that game tells me is a failed I don't think is a fail by light or anything else at all, probably a bug so minor nobody cared to fix? Remember people feel that the thief class is weak and from what I've seen on the forums they don't know how to backstab or bother with it because is extra micro for same damage output with less luck that just 18 DEX shortbow thief or a fighter/thief. Now about the lighting in places what I do is look for the darkness with my thief, if there's none I'll just move around near my party or just move on.

For the OP I would recommend hide your thief behind objects for a few seconds and if it didn't work in like 10 seconds just move on and try later.

Truth is this is so minor and 20 seconds is really nothing that I don't think this affects the outcome of future encounters. Don't let this ruin your game :D.

Same thing here, stopped using my thief because of it ( well the hiding part at least ).

You should try to learn how to backstab, specially to enemy mages. Is a 1 hit kill most of the time, it may be extra micro but it is awesome when it works.

Backstabbing mages is fun, ya. After a recent heavily modded BG II solo assassin playthrough at least here not all mages are under the influence of stoneskin from the get-go.

I just found this on the BG 1 Manual just in case it is useful for future players. "Moving
into the light or launching an attack can cause the hide to fail." Light seems to have an effect on the success of stealth. I don't know if it's the same for IWD but if it runs in the same rules it should be affected by light.

Edit: Just checked the IWD Manual and it does say the same thing.