Unity API Example in C# - PrefabUtility.CreateEmptyPrefab & PrefabUtility.ReplacePrefab. You will need to put this in Assets/Editor (make it if it doesn't already exist) as this is a Editor script.

CreatePrefabEditor.cs

using UnityEngine;
using UnityEditor;

public class CreatePrefabEditor
{
	/* Example from Unity API Documentation for:
	 * PrefabUtility.CreateEmptyPrefab (Looks like a duplicate example) &
	 * PrefabUtiltiy.ReplacePrefab
	 * Converted from UnityScript to C#
	 * 
	 * However, if you make a prefab from the project folder, there are a few errors
	 * generated from the CreateNew() function.
	 * 
	 * Creates a prefab from the selected GameObjects.
	 * If the prefab already exists it asks if you want to replace it
	 * 
	 */ 
	
	[MenuItem("Examples/Create Prefab From Selected")]
	private static void CreatePrefab() 
	{
	    GameObject[] objs = Selection.gameObjects;
	
	    /* For each gameobject in selected array, 
	     * Creates an empty prefab then replaces it
	     */
	    foreach(GameObject go in objs) 
	    {
	    	string localPath = "Assets/" + go.name + ".prefab";
	    	
	       if (AssetDatabase.LoadAssetAtPath<GameObject>(localPath))
	       {
			if (EditorUtility.DisplayDialog("Are you sure?", 
	                "The prefab already exists. Do you want to overwrite it?",
	                "Yes", "No"))
	            {			
	            	CreateNew(go, localPath);
	            }
		    }
		    else
	        {
	        	CreateNew(go, localPath);
	        }
	    }
	}
	
	[MenuItem("Examples/Create Prefab From Selected", true)]
	bool ValidateCreatePrefab() 
	{
	    return Selection.activeGameObject != null;
	}
	
	// Create Empty Prefab and then Replace 
	static void CreateNew(GameObject obj, string localPath) 
	{
	    Object prefab = PrefabUtility.CreateEmptyPrefab(localPath);
	    PrefabUtility.ReplacePrefab(obj, prefab, ReplacePrefabOptions.ConnectToPrefab);
	}
}