A butch can be a masculine woman, or an ultra-masculine man. In lesbian culture, butch is the opposite of femme; among gay men, it's the opposite of nellie or nelly. "Nelly" is not often used, but butch and femme have stuck around as terms to describe people's perceived gender role.
Some women don't like adding this gender dichotomy into their relationships, prefering to think of themselves as feminine or androgynous.
Being butch is about attitude, body language, clothing style, self-image, and emotional makeup. You can put on a dress, and still look damn butch.
You can make further mixed-up distinctions. Deciding whether someone is actually a femmy butch, or a butchy femme, can cause an amusing argument. The femmy butch is basically butch; for example, picture a burly construction worker who likes to paint her toenails and collect Hello Kitty paraphrenalia. The butchy femme is feminine in many ways but wears combat boots with her miniskirt.