WordPress allows you to categorize your blog posts. There are also some plugins that let you work with tags. Seemingly both of them can be used for the same thing – qualify your posts. However, I think they are different, or at least my usage is different. On this blog I use categories for topics and tags for keywords. Both can be used for navigation, but categories present structured navigation, its language is specific to this blog. The keywords are global, which would stand their context and meaning even outside this blog. Posts by Carthik Sharma and Lorelle give the best explanation.
Why do I need both? One is because I write on a subject, and it involves many things, which I want the readers to be able to use to navigation. For example, when I write about programming I might talk about some book. Programming is the topic here, hence a category, and the book name is the keyword, hence a tag.
How do you use them? Do you find it confusing on this blog?

January 10th, 2007 at 10:55 am
I generally would use category for internal – within the site. While tags can be used for keyword specific content, they help to drive traffic to the site from external sources like technorati, etc.
Alpesh
January 11th, 2007 at 10:46 am
I pretty much follow the exact method you use. If I’m talking about writing a Greasemonkey script and how to get something working, like you said, the category might be programming. However, it also relates to Firefox, so I might throw a firefox tag on it. The problem I find is over tagging. I find myself to be a bit “tag happy” at times. Too many tags can take away from the user finding what they wanted, because it will relate to too many posts. What do you think about that?
January 11th, 2007 at 11:40 am
I think lot of tags is good, more people can reach you. Just that, like you said, the tag should not diluted by applying to posts where it might not be useful. But in my opinion more number of tags is good. I think if we try to come up with tags from the reader’s perspective we will make less mistakes.
January 23rd, 2007 at 8:03 pm
I agree that categories and tags can be quite different. Generally speaking, it would seem to make sense to limit the number of categories for a post to one or two, but to allow more tags, depending on the content of the post. I also like to explore tags across many web 2.0 sites, rather than keeping tags on my own site. Try TagBuildr to see what I mean.
July 23rd, 2007 at 6:53 pm
[...] and tags. Going through the discussions on categories vs tags from the WordPress community is refreshing to see usage disparities. Flexibility is needed. In short, since categories can be tags, so can [...]