Defuse: to remove the fuse from explosives.

e.g. James Bond defused the bomb seconds before it would have exploded.

This usage is mostly limited to bomb squads and action movies. It is an action movie cliche.

More commonly it is used as a metaphor, meaning to remove the tension and potential for destruction from a situation.

e.g.: The skilled negotiator defused the tense standoff an prevented a riot.
the atmosphere at work was tense, so I tried to defuse it by cracking a joke.

One should not confuse this word with diffuse, which although it is pronounced in much the same way, has an entirely different meaning, and one should refuse to fuze the two.