DFU update means putting your device into DFU mode, which is holding the power/sleep and home button for about 10-11 seconds, then release the sleep but hold on to the home until you hear the sound that a hardware has been connected or iTunes pops up saying your device is detected in recovery mode (even though it's in DFU mode with a black screen).
DFU mode basically allows you to restore your device in any state, meaning if you're in a loop or you have a bad springboard.plist and such and such, you can restore it. This is particularly important for jailbroken devices since in some cases, the restore trips the little mechanics in the security ports that're open/closed during a jailbreak, or in some cases, some of the jailbroken data are left on the device and since iOS does not natively recognize or support jailbreak data, you'll end up with a software conflict where your device goes "I don't know what this is, probably something bad. I'll just go in a recovery loop since I can't run that".
On clean devices, this is basically a failsafe way to ensure that the iOS is installed to perfection.