Literary journalism refers to the use of fictional techniques in writing a work of nonfiction. In other words, it's a true, well-researched, journalistically-sound story that might normally be written in a dry newpaperly manner that has been instead written with style, vivid description, and narrative flow that immerses the reader in the story. The quality of the writing used to tell the story is just as important as telling the truth of the story.
The terms "digressive narrative nonfiction", "creative nonfiction" and "New Journalism" are synonymous with literary journalism. The term "New Journalism" was coined by Tom Wolfe in the mid-60s to describe the stylish writing done by that era's up-and-coming Young Turks of magazine journalism who were kicking down the doors of dry, objectivity-first, "just-the-facts-ma'am" traditional journalism. But fewer people use this term today because "new" journalism didn't replace "old" journalism by any stretch.
Furthermore, what is today considered "literary" journalism has a long past. Writers such as Daniel Defoe, Samuel Clemens, Stephen Crane, James Agee, and Ernest Hemingway all wrote nonfiction in a vivid, narrative style.
In more recent times, authors most often associated with literary journalism include:
Literary journalism is cousin to nonfiction genres such as travel writing, personal essays, memoirs, and to pseudofiction (fictionalized accounts of true stories). Capote's grim nonfiction crime novel In Cold Blood is a classic example of literary journalism, as are Kidder's Soul of a New Machine and Didion's Slouching Towards Bethlehem.
Detractors of literary journalism accuse the genre of lacking objectivity and factuality; however, the best literary journalists make sure to keep the covenant of truth between themselves and their readers and maintain the essential factuality of their stories. But, for editors and readers who prefer dry factual nonfiction writing, literary journalism may never give them the black-and-white reality consensus they crave.
References:
Literary Journalism edited by Mark Kramer (Ballantine Books)
A History of American Literary Journalism by John C. Hartsock (UMass Press)
http://www.utoledo.edu/~pmany/litjournal.html