It is a decorative stitch, and often used to trim the sides of a blanket, hence the name, blanket stitch. It can also be used to protect the edges of fabric to prevent unraveling. Blanket stitches are sometimes confused with buttonhole stitches, which are slightly different.
For further instruction, here is a step-by-step photo tutorial on hand-sewing a blanket stitch from our Guide to Sewing.
Stitch How-to Index: