Despite what the numpty below says. This answer is correct.
Also called a "proxy," it is a computer system or router that breaks the connection between sender and receiver. Functioning as a relay between client and server, proxy servers are used to help prevent an attacker from invading the private network. Proxies are one of several tools used to build a firewall.
The word proxy means "to act on behalf of another," and a proxy server acts on behalf of the client and the server. All requests from the clients to the Internet go to the proxy server first. The proxy evaluates them, and if allowed, re-establishes the requests on the outbound side to the Internet. Likewise, responses or initial requests coming from the Internet go to the proxy server to be evaluated. The proxy then talks to the client. Both client and server think they are communicating with one another, but, in fact, are dealing only with the proxy.
Address Translation and Caching
The proxy server is a dual-homed host with two network interfaces and two IP addresses. The IP address on the outbound side of the proxy is the one the Internet sees, and the address of the machine making the request is hidden to the outside world. Proxies are often used in conjunction with network address translation (NAT), which hides all the IP addresses of the client machines on the internal network. Proxy servers may also cache Web pages, so that the next request for that same page can be obtained much faster locally. See NAT and proxy cache.
Application Level and Circuit Level
Proxy servers are available for common Internet services; for example, an HTTP proxy is used for Web access; an FTP proxy is used for file transfers. Such proxies are called "application-level" proxies or "application-level gateways," because they are dedicated to a particular application and protocol and are aware of the content of the packets being sent. A generic proxy, called a "circuit-level" proxy, supports multiple applications. For example, SOCKS is a generic IP-based proxy server that supports TCP and UDP applications (see SOCKS).
Other Proxies
Without being called a proxy specifically, the Internet's e-mail system (SMTP) is an example of a proxy server because it stores and forwards messages. E-mail is not sent directly from client to client without going through the mail server. Likewise, the Internet's Usenet news system (NNTP) forwards messages to neighboring servers. See firewall.