I found this reference to it HERE where "Judith" said:

I only heard it used when somebody had been repeatedly carrying on in the same nonproductive fashion seemingly forever and their friend was basically telling them to change their act, go on to something else. The same person (a self-described 'hillbilly') used the phrase when somebody kept harping on the same subject over and over. Sometimes the meanings are shifted by whomever is using them, that is, if one culture adopted the saying from another.

She also said, I've heard the term "(it's time to) squat that rabbit" as meaning it's time to change what you're doing right now, enough already. But when the song goes "baaad rabbit" (Taj Mahal), sounds to me like "rabbit" refers to the male anatomy.

And, here is a youtube vid of the man himself doing Squat that Rabbit!

I wondered if it had anything to do with the rabbit dying in a pregnancy test, as in the "old days" but listening to the song, I don't think so.