Resolvers in client software such as a web browser, are not designed to hunt down answers about hosts and domains on their own. They rely on the local DNS server to do this for them. For this systemof having client software relying on a DNS server to work, a recursive DNS server must be available for these clients.
An Iterative DNS query results in a single DNS server being queried, and only getting a single response. If the DNS server has the answer, it sends it. If not it sends a "host/domain not found" error message, but the DNS server does not do any additional resolution. It does not query any other DNS servers.
Because recursive lookup takes the DNS server longer and requires more memory to store records, it sometimes is more efficient to separate the DNS services for external (Internet) users from the internal (LAN) users. To do this, a recursive DNS server is provided for the internal users, and a non-recursive or 'iterative' server is provided for Internet users to enable them to resolve ONLY your domain.
A Domain Name Server which provides for iterative lookup performs resolution using the information within it's own lookup tables. It does not query other name servers for information. When a client request is sent to the server, it searches it's local database, and if it has an answer, it will reply. If it does not have an answer, it will respond with a 'host not found' message.
Iterative servers are useful when you wish to provide resolution for your own zone, and only your zone. All users pointed at this server to fail to resolve anything not entered on the DNS server. This restricts the nameserver to responding for only information stored on it, and thus is useless for resolving anything else. This decreases the usefulness of the machine for any other purpose than resolving your domain, and will speed up DNS resolution to some degree as well.