"Audio volume limiting system" IIRC. It's used in MDs and Discmans. If it's the same as in those units, it limits the volume to a certain level, but it's not the same as normalization. If you have two MP3s at different levels, it'll only limit the system volume to a certain level. i'll have to read the manual to be sure about though, they could've actually made it useful considering how well everything else works.
Edit: Just tried it and confirmed it with the PSP manual. Pretty much useless as usual.
The PSP manual is online:
http://www.us.playstation.com/psp/Manuals.aspx