The uncanny valley is a term used to reference the phenomenon where when a computer animated human bears a certain level of resemblance to a real human being, it invokes a feeling of revulsion or unease in the person viewing it. A popular example would be the characters of BEOWULF and POLAR EXPRESS. The resemblance to actual real human beings is almost too close that it gives audience members a level of unease.
The “valley” refers to the dip in the graph of comfort level vs natural human likeness. In other words, if you plot a graph where the x axis is the resemblance to a real human, and the y axis is the empathic response, as you start from a character that doesn’t at all resemble a human and slowly increase its resemblance to a real human, the empathic response remains constant until you reach a point where the character is like those of BEOWULF or POLAR EXPRESS at which point your empathic response drops slightly before coming back on track. The challenge when using computer animation is to make sure that if you’re characters are meant to feel animated that they stay to the left of the uncanny valley and not get too close to it. And vice versa, if your characters are meant to feel real (like AVATAR) to stay as far right of the uncanny valley.