Story internal is a term I first learned on rec.alt.books.tolkien, but that can obviously be applied to other literary discussions.
Story internal is a term for an explanation of something unusual within a story that doesn't try to go beyond the text of the story itself to explain what is going on.
To use an example that many people would be familiar with, the story internal explanation of whether or not Hamlet is mad is that he is both distraught with his situation and pretending to be mad to gain his revenge. To contrast, the story external explanation could be that Shakespeare (I have heard), wrote the play in a single night, and therefore didn't quite sort out Hamlet's motives completly.
Whether story internal or story external leads to better explanations, and which is in the better spirit of the book, is a debate amongst people who consider such things.