(Edit on 3 November 2009 at 16.34)
Loy Krathong is held on the full moon of the 12th month in the traditional Thai lunar calendar. In the western calendar this usually falls in November.
"Loi" means "to float". "Krathong" is a raft about a handspan in diameter traditionally made from a section of banana tree trunk (although modern-day versions use specially made bread 'flowers' and may use styrofoam), decorated with elaborately-folded banana leaves, flowers, candles, incense sticks etc. During the night of the full moon, many people will release a small raft like this on a river.
The festival probably originated in India as a Hindu festival similar to Deepavali as thanksgiving to the deity of the Ganges with floating lanterns for giving life throughout the year. According to the writings of H.M. King Rama IV in 1863, the originally Brahmanical festival was adapted by Buddhists in Thailand as a ceremony to honour the original Buddha, Siddhartha Guatama. Apart from venerating the Buddha with light (the candle on the raft), the act of floating away the candle raft is symbolic of letting go of all one's grudges, anger and defilements, so that one can start life afresh on a better foot. People will also cut their fingernails and hair and add them to the raft as a symbol of letting go of the bad parts of oneself. Many Thai believe that floating a krathong will create good luck, and they do it to honor and thank the Goddess of Water, Phra Mae Khongkha (พระแม่คงคา). (Source http://www.wikipedia.org/)