What does Squid do or act like when its out of file descriptors?

When Squid sees it's short of filedescriptors it stops accepting new
requests, focusing on finishing what it has already accepted.

And long before there is a shortage it disables the use of persistent
connections to limit the pressure on concurrent filedescriptors.

What does it to do in such case?

Once Squid has detected a filedescriptor limitation it won't go
above the number of filedescriptor it used at that time, and you need to
restart Squid to recover after fixing the cause to the system wide
filedescriptor shortage.

do squid recover or do it need to be restarted?

depends on the reason to the filedescriptor shortage.

If the shortage is due to Squid using very many filedescriptors then no
action need to be taken (except perhaps increase the amount of
filedescriptors available to Squid to avoid the problem in future).
Squid automatically adjusts to the per process limit and hitting the
system wide limit if it's lower than the per-process limit.

If the shortage is due to some other process causing the systems as a
whole to temporarily run short of filedescriptors or related resources
then you need to restart Squid after fixing the problem as Squid has got
fooled in this situation into thinking that your system can not support
a reasonable amount of active connections.