Dither is a type of intentional variation (noise) which is added to a digital audio signal to avoid distortion caused by quantization errors.
Dither is often used when an analog signal is being quantized into a finite number of digital levels. It is also often used when a digital signal is being quantized into a fewer number of bits per sample corresponding to a fewer number of digital levels.
Dither randomizes the errors caused by quantization. Without dither, quantization can produce intermodulation distortion. This distortion is produced by an intermodulation between the audio and sampling frequencies. Dither prevents this distortion by randomizing the energy produced by the quantization errors.
When dither is properly applied, the quantization error signal is random noise. When dither is not applied, the error signal is distortion.
Dither gives a digital system infinite amplitude resolution between the finite digital quantization levels. With dither, audio signals that have a peak-to-peak amplitude of less than 1 bit, can be digitized, transmitted by the digital system, and converted back to analog. Dither gives a digital system a continuous amplitude resolution so that it behaves just like an analog system.