You’ve seen the ISO button on your camera. What does it do, and why does it matter?
ISO- an abbreviation for International Organization for Standardization- refers to a standard measure of the sensitivity of film or digital sensors to incoming light. The higher the ISO rating, the more sensitive the sensor and the less light required to form an image. Wikipedia carries a nice summary of the technical details.
Most digital cameras support a range of ISO ratings from 100 to 3200 or even higher. These ratings are calibrated so that a doubling in number indicates a doubling of sensitivity. ISO 400, for example, is twice as sensitive as ISO 200 and can form an image with half the available light. Set the ISO up to 6400 and you can photograph night scenes, concerts, and dinner parties at fast shutter speeds without using a flash. Basically, ISO is a way to control exposure from the sensor side of the equation rather than managing incoming light with shutter speed (=duration of exposure) and aperture (=size of the opening in the lens).
But all you ISO jockeys out there in cameraland should be aware of the bad news. ISO is intertwined in a steep trade-off with image quality. Sensitive sensors record more noise. Consider this photograph of a window, captured with Canon’s EOS 7D dSLR.

A series of 100% crops of the window pane taken at different ISO ratings (and changing the shutter speed to maintain a comparable exposure) reveals the trade-off:



As you can see, the relatively insensitive ISO 100 produces a smooth, clean, noiseless image. That’s because the sensor is recording data by averaging over a greater number of incoming photons, allowing it to form a more accurate picture of the color and intensity of light. The shot at ISO 6400 is taking scant information from relatively few photons and running with it, and the image is grainy and imprecise.
So what ISO setting should you use? As a general rule it is best to shoot with lowest ISO setting possible given the lighting conditions.
I keep my cameras at a default setting of ISO 100 so the images have minimal noise. Only under low-light conditions where the optimal shutter speeds become unacceptably slow do I raise the ISO.