Probably the most common of the
magickal tools used by
Wiccans and other
pagans. It is essentially a
knife; the specific form and uses vary by
tradition.
The athame is sometimes called the "black-handled knife" because some traditions say it must have a black handle. Some say it is best to make the handle yourself, and even the blade if you can; Raymond Buckland's Complete Book of Witchcraft includes instructions on how to do so. Others are not so optimistic about the crafting skills of most people in today's society and say it's fine to buy it, as long as you choose one that feels right to you.
In some traditions, the athame must NEVER be used to cut anything physical, only to direct or cut energy. These traditions also have a bolline or "white-handled knife" for other magickal uses, such as cutting herbs.
Others use only the athame and say it can be put to any ritual use, such as carving letters into candles, but should never be used for any non-magickal use.
Then there are the kitchen witches, who will prepare food with the athame, because after all, food is magickal too.
As well as being used to direct energy, the athame is also a symbol of the God or masculine energy. It is paired with the cup or chalice, which represents the Goddess or feminine energy. A ceremony called the Great Rite involves inserting the athame into the chalice as a symbol of Their union. (Some groups instead observe the Great Rite more directly: the priest and priestess have sex.)
Many traditions also associate a tool with each element: a pentacle for earth, the athame for air, a wand for fire, and the chalice for water. As swankivy says above, the wand and athame associations can be switched; this is actually a bit of a debate in tarot, where some decks use wands (or rods or staves) for fire and others use them for air. (Most decks have swords or some other sharp implement instead of athames.)