MP3 is the common name for the MPEG-1 Audio Layer 3(III) or MPEG-2. It is a patented digital audio encoding format using a form of lossy data compression.
MP3 is effectively the standard audio format for consumer audio storage and for the transfer and playback of music on digital audio players. It uses a lossy compression algorithm which, while removing some information, is "good enough" for most everyday uses.
For more information see the Wikipedia entry