KVM (for Kernel-based Virtual Machine) is a full virtualization solution for Linux on x86 hardware containing virtualization extensions (Intel VT or AMD-V). It consists of a loadable kernel module, kvm.ko, that provides the core virtualization infrastructure and a processor specific module, kvm-intel.ko or kvm-amd.ko. KVM also requires a modified QEMU although work is underway to get the required changes upstream.
Using KVM, one can run multiple virtual machines running unmodified Linux or Windows images. Each virtual machine has private virtualized hardware: a network card, disk, graphics adapter, etc.
The kernel component of KVM is included in mainline Linux, as of 2.6.20.
KVM is arguably a TYPE 1 Hypervisor according to this IBM blog post on virtualization:
…but the truth is that KVM actually does run directly on x86 hardware. People assume it is a type 2 hypervisor because one of the ways that it is packaged is as a component of Linux - so you can be running a Linux distribution and then, from the command-line shell prompt or from a graphical user interface on that Linux box, you can start KVM. The interface makes it look like it is a hosted hypervisor running on the operating system, but the virtual machine is running on the bare metal - the host operating system provides a launch mechanism for the hypervisor and then engages in a co-processing relationship with the hypervisor. . In a sense, it is taking over part of the machine and sharing it with the Linux kernel.
On x86 hardware, KVM relies on the hardware virtualization instructions that have been in these processors for seven years. Using these instructions the hypervisor and each of its guest virtual machines run directly on the bare metal, and most of the resource translations are performed by the hardware. This fits the traditional definition of a “Type 1,” or bare metal hypervisor.
You can also get KVM packaged as a standalone hypervisor - just like VMware ESX is packaged - but initially KVM was not available in that package. One way of doing this is with Red Hat Enterprise Virtualization (RHEV).
For a more technical debate whether KVM is TYPE1 or TYPE2 Hypervisor check this interesting blog post by mrpointy.