The Hosts file contains the mappings of IP addresses to host names. This file is loaded into memory (cache) at startup, then Windows checks the Hosts file before it queries any DNS servers, which enables it to override addresses in the DNS. This prevents access to the listed sites by redirecting any connection attempts back to the local machine. Another feature of the HOSTS file is its ability to block other applications from connecting to the Internet, providing the entry exists.
Example - the following entry 127.0.0.1 ad.doubleclick.net blocks all files supplied by that DoubleClick Server to the web page you are viewing. This also prevents the server from tracking your movements. Why? … because in certain cases “Ad Servers” like Doubleclick (and many others) will try to open a separate connection on the webpage you are viewing.
Lots more information and download links and installation instructions at Blocking Unwanted Parasites with a Hosts File
Vista users make sure you read the special instructions here