In general, it means that the lawsuit may not be refiled, and as such, it operates as an adjudication on the merits. The dismissal may be voluntary (that is, the plaintiff dismisses with prejudice when a settlement has been consummated), or it may be involuntary (often as an extreme sanction imposed by the court for disobedience to court orders).
The concept also exists in other judicial forums, such as Bankruptcy Court, and has a similar import.