The fictional world of a novel or film.
The adjective "diegetic," then, refers to anything within that fictional world. A diegetic sound in a film is part of the story's action or environment: e.g., music playing on the car sound system as a character is driving.
An "extra-diegetic" sound, on the other hand, comes from outside the world of the story: e.g., music that is part of the sound track of the movie, heard by the audience but not the characters.
Theorists Roland Barthes and Gerard Genette also use the term diegesis to denote a description or narration that is presented as judgment free: that is, foregoing any moral, philosophical, or retrospective views made possible by following from beyond the story-world--instead, taking the action on its own terms. The more opinionated or noticeable a story's narrator is, the more "extra-diegetic" he/she is being.