And what does it mean for combat in a game?
A "Death Spiral" is something that can happen in games where your combat skill is affected by your health (or similar attribute). If you take a hit, your combat skill decreases slightly (making it harder for you to hit the opponent and/or easier for the opponent to hit you).
While there is a certain realism to this, it can often quickly lead to the "death spiral" where each hit makes it increasingly unlikely for the loser to come back, as they are getting consistently worse at attacking and/or defending.
It can lead to very lopsided combat, even against some seemingly well-matched opponents.
The death spiral is the process where a given character continues to lose ability to fight when they take damage due to injury penalties.
Some games have a profound spiral; the first guy to do any real damage develops a large and widening ability gap over the opponent. Some of the most profound include Traveller (CT, T4, and MGT editions), Burning Wheel, Shadowrun, White Wolf's Storyteller system, and Cyberpunk 2020.
Others have a delayed Spiral, where damage doesn't apply penalties until a heavy amount has been taken. Examples include: Warhammer FRP (1E, 2E), Dark Heresy, Rogue Trader, Pendragon, several BRP variations using hit locations.
Many others have no death spiral at all; you fight full up until you drop. Examples include all D&D editions, most Palladium Books games.
While realistic in a sense, the death spiral often isn't any fun.
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The bad thing about a spiral is it can make getting in the first whack exceedingly important. In a game with a long, slow death spiral, this can result in spending a lot of time as character who really lost the fight in the first round of combat is slowly whittled down in a death of a thousand cuts.
The good thing about death spirals is that they do tend to be slow, and that means players can quickly grasp that they're in a bad situation and start looking for ways out before it's too late.