The term legato comes from academic classical music, where it is utilized to indicate that two or more notes are to be played or sung as 'connected' as possible, leaving the minimum possible silence between them. Usually the notes that are to be played in this fashion are graphically grouped by a curved line, or slur. Less frequent is the use of the word legato over the staff.
Naturally, this instruction to play 'as connected as possible' has diverse implications according to the technique of each instrument: bowed string instruments, for example, will normally attempt to play slurred groups of notes by employing a single bow movement. Similarly, wind instruments will usually read slurs as instructions to play without using a tongue articulation for each note.
In the field of guitar playing (mostly on popular styles), the term legato is used interchangeably for the actual articulation and a particular technique, which consists of playing a musical phrase using mainly hammer-ons and pull-offs:
the string is set in motion with the first note played by the pick or the right hand fingers. The following notes are played by means of hammer-ons and pull-offs only. If the musical phrase to be played involves more than one string, the pick may be used to play the first note on each string, activating it and allowing the left hand to play the rest of the notes alone.
The legato technique is an essential tool to develop speed, as it momentarily eliminates the need for strict left-right hand coordination. Sometimes, guitarists will even avoid using the pick or the right hand to set in motion the strings, relying only on their left hand strength. This blurs the line between the legato technique and left-hand tapping (part of the two-hands tapping technique).
From an academic perspective, it should be noted that these are merely the common technical approaches to playing legato, and by no means should the articulation legato be confused with the actual techniques. It is possible to play 'as legato as possible' and still use several bowstrokes, or articulate with the tongue or the pick if it is required (or indicated).