It locks the orientation of your screen. Press the home button quickly twice, then swipe your finger to the right until you see the iPod controls. To the far left you should see a circle with an arrow, and have the lock in the center. If you want to remove the orientation lock just tap the circle and lock will disappear.
" Shows that the iPhone screen is locked in portrait orientation.
See “Viewing in Portrait or Landscape Orientation” on page 32.
Portrait orientation lock..."
iPhone User Guide