OTP stands for One Time Password and is a type of password that, as the name suggests, can be used only once, or per single sessions. A password of this kind expires as soon as it's used, so a new password must be generated for a later session. This approach can eliminate all the problems related to the usage of static passwords (low complexity, replica attacks, lack of update, etc..). Some fundamental requirements lay at the basis of the OTP technique, like proper synchronization between the password generator and the authentication server, and the algorithm that generates passwords.
A practical example of OTP passwords is offered by some banks for the access of its Web services, which provides a physical token that can generate a new key each time.