Anyone you see in a game, on TV, or in real life that you don't know enough about to care about. A character that's there just to fill up space; there's no chance that the DM has actually created a backstory for them. For example, people you see on the subway, or the new member of the away team from Star Trek. Of course, in real life, Everyone is a PC; but the brain gets lazy and stereotypes strangers, so you don't have to worry about them.

In videogames, NPC stands for Non-Player Character (a term which, I've been recently told, originated in the 1980's from Roleplaying games, such as D&D). That would mean anyone that's not being controlled by any of the players (and is not hostile towards them, but I could be mistaken). Their general use is to fill spaces. Usually towns, parks or whichever place needs to be populated (depending on the game's contextual environment). Sometimes the player can talk to them and they respond and sometimes they're simply ornamental.

They can also be used as

There are possibly many other uses for the NPC's. These are the most common I've seen.

Sources: Videogames, mostly RPG's: The ones mentioned above. 20070823 - Correction, suggested by rootbeer277 20070827 - Adding information provided by StrawberryFrog

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