A volatility index is a measure of the volatility of securities prices, which may measure the volatility of an index or of a basket of securities in that index. It may be based on implied volatility or realised volatility.
By far the best known volatility index is the VIX index provided by the Chicago Board Options Exchange (CBOE) which measures the volatility of the S & P 500. It is a weighted average of the implied volatility of options on the S & P 500 (strictly speaking these are CFDs) that have more than a week till expiry and which expire in the current month (except during the last week of each month when it uses options expiring over the following two months). It is designed to measure expected volatility for the next 30 days.
Other volatility options exist, covering other markets (including European and Asian markets), commodities, currency, etc. These include a FTSE 100 implied volatility index.
Implied volatility indices measure expected volatility, so they function as a measure of investor sentiment as well as uncertainty. Realised volatility indices measure the market impact of recent news and historical (but recent) investor sentiment. Both are used to forecast volatility as part of hedging strategies, and for security pricing. It is also used as a source of buy and sell signals, but, as always with any data used for timing, its effectiveness is questionable.