Interwiki links are links, generated by specific wiki markup, pointing to a website registered in advance. For example, from any MediaWiki-powered website, you can link to the Sunflower article on http://en.wikipedia.org by typing [[wikipedia:Sunflower]]; “wikipedia” is the so-called “interwiki prefix”.
Until now, the list of interwiki prefixes available on a Wikimedia wiki was only visible in manually maintained lists. The Interwiki extension changes that by offering a special page of the wiki, available to all, and listing all available prefixes and their target.
Interwiki links are often intermixed with “interlanguage links“, the small navigation links that show up in the sidebar of most Wikipedia skins, and connect a page with their counterpart in other languages. Indeed, the new Interwiki special page shows both interwiki and interlanguage prefixes.