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Interlocking is usually mechanical or relay based. In such interlocking systems, the various routes and switches outside a station are physically connected together so that setting one route through the station automatically disables all other routes.
For example, in a station with 2 loop lines and a main line, if a train is going to pass through the main line without stopping, the main line signal will be set to green and the switches will be set so that the train stays on the main line. In a mechanical interlocking, the points and signals will be connected in such a way that turning the signal green automatically prevents the points from being changed until the signal is...
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changed to Red. This prevents accidental changing of points while the train is passing through. Relay based systems also do a similar thing where the electronic switches operating the points are connected in such a way that switching on a few switches automatically disconnects other switches.
In these systems, if the routes in the interlocking have to be changed, say, after construction of a new loop line, then all the mechanical/electrical connections have to be relaid again. In a Solid state interlocking, all the switches controlling the points and signals are controlled via software running on microprocessors ( Hence the name 'solid state', which is the general term used for semiconductor devices like microprocessors). In these systems, changing the routes can be done purely through software changes and does not require any physical modifications in the Yard.

In railway signalling, an interlocking is an arrangement of signal apparatus that prevents conflicting movements through an arrangement of tracks such as junctions or crossings. The signalling appliances and tracks are sometimes collectively referred to as an interlocking plant.

A minimal interlocking consists of signals, but usually includes additional appliances like switches / Points, derails, crossings at grade and movable bridges. Some of the fundamental principles of interlocking include:
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1. Signals may not be operated to permit conflicting train movements to take place at the same time.

2. Switches and other appliances in the route must be properly 'set' (in position) before a signal may allow train movements to enter that route.

3. Once a route is set and a train is given a signal to proceed over that route, all switches and other movable appliances in the route are locked in position until either
a. The train passes out of the portion of the route affected, or
b. The signal to proceed is withdrawn and sufficient time has passed to ensure that a train approaching that train has had opportunity to come to a stop before passing the signal.

Types of Interlocking:

Mechanically operated interlocking:
In mechanical interlocking plants, a locking bed is constructed, consisting of steel bars forming a grid. The levers that operate switches, derails, signals or other appliances are connected to the bars running in one direction. The bars are constructed so that, if the function controlled by a given lever conflicts with that controlled by...
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another lever, mechanical interference is set up in the cross locking between the two bars, in turn preventing the conflicting lever movement from being made.

Manually operated interlocking:
This is a form of mechanical interlocking as well, but relies on the signalman to move about from one set of points and signals to another carrying with him the keys used to operate them.

Electrically operated interlocking:
In the more advanced electrical or electronic interlocking schemes, the points and signals are worked from one integrated mechanism in a signal cabin which features a display of the entire track layout with indications of sections that are occupied, free, set for reception or dispatch, etc. The interlocking is accomplished not by mechanical devices but by electrical circuitry -- relays and switches in older electrical or electropneumatic systems, and computerized circuits in the newer electronic systems.

Panel Interlocking:
It is a system used in most medium-sized stations on IR. In this, the points and signals are worked by individual switches that control them.

Route Relay Interlocking:
It is the system used in large and busy stations that have to handle high volumes of train movements. In this, an entire route through the station can be selected and all the associated points and signals along the route can be set at once by a switch for receiving, holding, blocking, or dispatching trains.

Source: Wikipedia, IRFCA