A blinded character is unable to see. Attacks made while blind have a 50% miss chance and a -4 penalty to hit. Spells that require targeting others cannot be cast as a direct line of sight is required for this. The game's AI handles blindness poorly, and blinded entities controlled by the AI will not attack at all.
Oddly enough, in NWN2 (as in NWN1), a character suffering from this condition can still use (i.e., read) magical scrolls.
Also note that the effect does not stack with concealment.
DnD 3.5 Comparison
A blinded character takes a -2 penalty to Armor Class, loses his Dexterity bonus to AC (if any), moves at half speed, and takes a -4 penalty on Search checks and on most Strength- and Dexterity-based skill checks. All checks and activities that rely on vision (such as reading and Spot checks) automatically fail. All opponents are considered to have total concealment (50% miss chance) relative to the blinded character.