"Dilute" generally means to make a liquid weaker or thinner by adding water or some other solvent to it. "Dilute" also means to lessen the depth of color in an object. Informally, it means to water something down.
There are many reasons for diluting certain liquids to make them a little weaker. For example, some household cleansers are not made to be used straight out of the bottle; instead, the instructions call for them to be diluted before use. Sometimes paint is diluted to make it easier to apply. Water is appropriate for diluting water-based paint, but one must use a special solvent for diluting oil-based paint.