de • frag • men • ta • tion
n. The process of reorganizing a data storage device such that information (such as files) are stored on contiguous portions / sectors of the device, which optimizes the use of storage and increases performance. See also: defragment.
Every computer experiences the problem of fragmentation. Over time, data written to the drive will become fragmented, typically due to file size constraints or to file updating. In either case, the added data requires more space than previously allocated; if space in contiguous chunks is unavailable, the data will be spread across the first available chunks on the drive.
While this is not a major problem at low levels of fragmentation, the accumulated disk fragmentation can, over time, cause system slowdowns, as well as possibly accelerating the physical breakdown of the drive through constant wear.
Fragmentation is, in short, inevitable. However, defragmentation - the rearranging of file fragments, typically through the use of dedicated programs, can reduce the amount of fragmentation of a hard disk drive, and strongly improve its performance.
Addendum: It has been brought to my attention that certain modern filesystems actively avoid the problems of disk fragmentation through better disk allocation methods, and so defragmentation is largely unnecessary under these OSes. Furthermore, solid-state drives allocate data differently than magnetic storage drives, and so defragmentation is also unnecessary and possibly deleterious to hard drive health.