Navi is a fairy who is Link's "navigator". She is instructed by the Great Deku Tree in Kokiri Forest to assist Link in his quest to stop Ganondorf. All Kokiri have companion fairies, but because Link is actually a Hylian, he never received one until Navi joins him near the beginning of the events in Ocarina of Time.
In gameplay, Navi functions primarily as a guide that points out clues in the environment and helps the player learn the controls and advance in the game. Most of her hints are about how to progress in the story or defeat enemies. She can also be used to lock on enemies in the game, items and other characters. She is one of the few characters with any voice-acting in the series, and the only character who (aside from Beedle Link in The Wind Waker) actually uses English words, such as "Hey", "Look", "Listen", "Watch out" and "Hello".
Source: Wikipedia, "Characters in The Legend of Zelda series," available under the CC-BY-SA License.