Cel-shading, sometimes misspelled as 'cell shading', is an animation technique in which three-dimensional objects are rendered to appear two-dimensional, as if hand-drawn in the same manner as a cartoon or comic book.
However, just because an image maintains this appearance or has a sharp outline, this does not necessarily mean it has been cel-shaded. The difference lies in the methods of lighting which have been employed, using a limited number of color shades depending on depth of view and calculating values for each individual pixel accordingly.
The first video games to feature such a style include Doctor Hauzer for the 3DO in 1994 and Parappa the Rapper for the PlayStation in 1996. However, it was in 2000 that the style first gained prominence, with the release of Fear Effect for the PlayStation and especially Jet Set Radio for the Dreamcast. While most of these early games used drawn textures rather than shading, it was Jet Set Radio that introduced cel shading proper, as a shader that generates the cel-shading.