It indicates that the notes should be played with a smooth, flowing articulation, without any breaks or interruptions. It's essentially the opposite of "staccato," which means to play notes with a distinct separation.
Here are some synonyms for "lagato":
* Legato (also Italian)
* Smoothly
* Connected
* Flowing
You will often see "lagato" written above or below music notation, indicating how the notes should be performed.