Kernel panic is the action taken by an operating system kernel when it encounters a fatal error from which it can't safely recover. The term is usually used in reference to Unix and Unix-like operating systems such as Linux and BSD. It is similar to the condition of Windows operating systems known as the blue screen of death.
When an operating system panics, it typically displays an error message on the screen, and writes the contents of kernel memory (a core dump) to disk for later debugging. It then halts all CPU operation. It then either reboots automatically or waits for the user to manually reboot the machine, depending on how the operating system is configured.
A kernel panic is different than a simple system crash in that the operating system is aware that a crash is imminent, and voluntarily stops the CPU from continuing to operate. It does so to minimize the likelihood of data loss or another corruption of the state of the machine.