NPC's are abbreviations for Non Player Characters. In Diablo II, they almost exclusively inhabit the towns of each Act, and offer various services to the player, including buying/selling items, repairing items, gambling, handing out quests as well as bantering about various topics with the player.
Technically, Mercenaries could also be termed as NPCs, however they are never referred to as such in the Diablo II community. They are instead called hirelings, or mercs for short.
Deckard Cain is a special NPC. He is rescued when you complete The Search for Cain, and after that travels with you through all acts. He is key to completing several quests, and identifies all items in your inventory for free when you've rescued him. He always offers that service throughout the rest of the game after that.
Though most appear inside the town walls of the various acts, a few NPC's appear in the wilderness. They are: