I suspect it will only delete the app data from your iCloud account, not from your phone, but I would back up your phone first just in case (the backup will included your app data). Some apps (such as iWork apps) will give you the option to keep the data on your phone when you turn off iCloud syncing, but how it works for a specific app is up to the app developer.
Syncing app data with your iCloud account is usually done to all your app data to be consistent across other devices you may have that are also syncing with your iCloud account. In other words, if you had an iPad running the same app, changes to the app data on your pone would also change the app data for the same app on your iPad, so your game progress (for example) is consistent on both devices. But how it actually is used is up to the app developer.
Also, if you're doing this to save space in your iCloud account, you have very little to gain by not syncing your apps with your iCloud account.
You probably are gaining anything by syncing your apps with iCloud. But you probably won't save much by turning it off either. You can go to Settings>iCloud>Storage & Backup>Manage Storage, tap the name of your phone under Backups, then look at your apps under Backup Options (tap Show All Apps to see them all). It will show how much app data each app has under the name of the app.
If it doesn't add up to much, you might just want to leave iCloud syncing On. Then you won't have to worry about risking losing any of your app data by turn it to Off. I don't think you would, but as I said, I can't be certain. I would at least back up your phone before turning this off in case it did delete your app data.