Sje-ljudet, or 'the sje-sound', is one of the hardest parts of Swedish pronunciation to master. Linguists call it a 'voiceless palatal-velar fricative', but in reality, it's more like a Swedish inside joke: very few non-natives can master this sound, and many native Swedes are stymied by it as well. Your humble author gave up on it a long time ago, and whenever he has the opportunity to use his admittedly limited Swedish, he settles for a very Finnish-sounding 'sh' sound.
But, my failure at mastering this unique phoneme doesn't mean you shouldn't try! Mastering the sje-sound is an achievement akin to learning how to whistle — a not-insignificant number of adults can't whistle, and a not-insignificant number of Swedes can't pronounce the sje-sound according to the 'standard' pronunciation. If you're a foreigner, and you manage to learn to pronounce this sound like a native, then you'll be a superstar. Blonde, buxom Swedish women will want you, and blonde, buff Swedish men will want to be like you (or whatever your preference is in this situation).
Anyways, on to the sound itself: merely describing the sound won't magically help you figure out how to pronounce it, but it might help you figure out how to set up your speech organs to produce this sound reliably. I recommend listening to sound recordings by native Swedes to refine your technique, but for now, we'll settle for a rough approximation.
Anyways, to start, purse your lips a little. Never mind the fact that practically all Swedes seem to speak through pursed lips anyways; just purse them a little more than usual. Then, sort of make a 'groove' with your tongue, in order to form a narrow channel for air to go through, and then try to put it in the same position you would for the 'sh' sound --- then pull it back a little bit, bunch up the back of your tongue just a tad, and try to make something that sounds vaguely like a freezing wind rushing through a fjord in mid-winter, chilling the hearts of even the stoutest of men, and heralding the arrival of Ragnarök.
If you have something like that, you're close enough. If you can't manage it, even after years of trying, then feel free to indulge in another fine Swedish tradition: Flogstaskriket.
Update (Sept. 14, 2008): after interrogating every Swede I could get a hold of, I've discovered that there's more than one sje-ljud! Madness! The sje-ljud varies quite widely between dialects and individual speakers within dialects. For example, the chillingly beautiful Emma Härdelin (of 'Garmarna' and 'Triakel' fame — she's from Jämtland) seems to use a sound that seems to be a bit more like a 'hw' than the 'shkhwwwwwkh' I'm so used to failing at pronouncing. Non-standard sje-ljuder are quite normal and proper in Sweden; I've heard everything from my Finnish-sounding compromise of 'sh' to a guttural 'kh'. So, when visiting Stockholm and trying your hand at the lovely Swedish language, just pick a sound and go with it; they'll probably think you're from Scania or Åland or something.