It was explained in episode 21 of season one, titled Three Stories. It's an excellent episode, you should see it if you can (seasons one and two are out on DVD now) but if you can't, you can find a very good recap here: http://www.tv.com/house/three-stories/episode/402736/recap.html

He had an aneurism that clotted, leading to an infarction. Which basically means there was a blood clot in his thigh that blocked blood flow for three days before being correctly diagnosed. The delay in diagnosis lead to death of muscle tissue. His doctors recommended amputation, but House (being the ray of sunshine that he is) insisted that they simply remove the clot and restore blood flow. This option was dangerous because it would wash some pretty nasty stuff from the necrotic (ie dead) tissue back into his system—not to mention that it would be incredibly painful. The upside was that if it worked, he could regain full use of his leg. There were complications following the procedure and he was in extreme pain (like, maxed-out-on-pain-meds-and-still-screaming-like-a-girl pain), so he asked to be put into a chemically induced coma which would allow him to sleep through it. Once he was out, Stacy (his lover/health care proxy) okayed a middle ground procedure that would remove the dead muscle tissue, but allow him to keep the leg. We can debate the ethics of that decision until the cows come home, but for now let’s just stick with the facts—House woke up minus some thigh muscle, plus a limp and chronic pain.