I don't think it actually does much, it looks like it's just a cache for string literals. If you have multiple Strings who's values are the same, they'll all point to the same string literal in the string pool.
String s1 = "Arul"; //case 1
String s2 = "Arul"; //case 2
In case 1, literal s1 is created newly and kept in the pool. But in case 2, literal s2 refer the s1, it will not create new one instead.
if(s1 == s2) System.out.println("equal"); //Prints equal.
String n1 = new String("Arul");
String n2 = new String("Arul");
if(n1 == n2) System.out.println("equal"); //No output.
http://p2p.wrox.com/java-espanol/29312-string-pooling.html