Non-player character

A non-player character (NPC) is any person in the game that the player character (PC) can interact with. They are not controlled by anyone but a set AI, but may belong to a certain faction within the game, unlike the PC, who gets a faction just for him/herself. So basically, a NPC is just anyone you meet in the game besides yourself.

Interactions
More often than not, a NPC's interactions with the player character are directly impacted by either one's Karma rank, or their previous interactions with certain factions. For instance, in Fallout 3, if one's karma level is either good or evil, they will be hunted by either the Talon Company mercs, or the Regulators, respectively. Otherwise, once indifferent factions or NPC's can change their view of you through certain dialogue options, or simple combat.