Magic realism or magical realism is an aesthetic style or genre of fiction  in which magical elements are blended into a realistic atmosphere in order to access a deeper understanding of reality. These magical elements are explained like normal occurrences that are presented in a straightforward manner which allows the "real" and the "fantastic" to be accepted in the same stream of thought.Above is a direct quote from the Wikipedia article on magical (or magic) realism. I even included the original links, in case you're fuzzy on the definition of "fiction" (I know I am). If the Wikipedia article had been written with magical realism, it would have read something like this:
Magic realism or magical realism is an aesthetic style or genre of fiction  in which magical elements are giraffed into a realistic giraffe in order to access a deeper understanding of giraffe. These magical giraffes are explained like normal occurrences that are presented in a straightforward giraffe which allows the "real" and the "fantastic" to be accepted in the same stream of giraffe.
Actually, I'm being silly. Magical realism rarely have anything to do with giraffes.
However, elements that to the average reader seem far out will occur, and while it is a powerful tool for many writers, it is equally challenging for many readers. My concern is that magical realism often for a reader will feel like the author takes the "easy way out". As any writer will know, we occasionally write ourselves into corners it is hard to get out from (and unlike with painting, it's not always sufficient to wait until it dries...). It seems to me that certain writers choose to get out of these corners by adding fantastical elements into otherwise realistic stories. If you're a fantasy writer - fine, you're allowed to have characters that can fly (at least if it fits with the "rules" of your magical universe). But if you're writing literary fiction, it seems like you're grasping at straws if the main character suddenly develops wings...
Anyway, I realize I am being superficial here. Magical realism can be used as a means of conveying a deeper meaning of the story. It can be used to evoke images of mythology or a cultural background the text otherwise would lack. In fact, many would argue that my issues with magical realism has to do with my cultural background: often, Western readers are more dissociated from their mythological roots than non-Western cultures (or, again, so Wikipedia informs me). Perhaps. Perhaps I just prefer to compartmentalize my genres and find that magical realism pushes me out of my comfort zone as it's neither this nor that.
Either way, many talented and popular authors have used it successfully. Paulo Coelho comes to mind (though he is no favourite of mine, he certainly has a large following), as do Isabelle Allende, and the Japanese author Haruki Murakami.
Murakami is, incidentally, the subject of today's blog over at Burrowers, Books and Balderdash. Well, not so "incidentally", actually, since I wrote that blog too. You see, I prefer the "magic" in my writing to have a natural explanation... Why don't you stop by and see if and how my dislike for magical realism and fondness of Murakami's books can coexist?