Diacetyl is most often described as a butter or butterscotch flavor. Smell an unpopped bag of butter flavor microwave popcorn for a good example. It is desired to a degree in many ales, but in some styles (mainly lagers) and circumstances it is unwanted and may even take on rancid overtones. Diacetyl can be the result of the normal fermentation process or the result of a bacterial infection. Diacetyl is produced early in the fermentation cycle by the yeast and is gradually reassimilated towards the end of the fermentation. A brew that experiences a long lag time due to weak yeast or insufficient aeration will produce a lot of diacetyl before the main fermentation begins. In this case there is often more diacetyl than the yeast can consume at the end of fermentation and it can dominate the flavor of the beer.
You actually don't need a diacetyl rest unless you have diacetyl. This is more common in lagers that are pitched warm and then the temperature reduced for fermentation. If you're doing a lager and need to do a diacetyl rest, then when fermentation is about 75% finished, you raise the temperature to 65-68 degrees for about 48 hours so that the yeast can clean up any diacetyl. If you cold pitch your lagers, this usually isn't needed. I've only needed to do a diacetyl rest one time. It also depends on the yeast strain- some lager yeasts are notorious for producing diacetyl. Some don't.