Third and final edit: Here's an article explaining it in more detail. Looks like it isn't a built in function, but rather something that is commonly added in a lot of frameworks. It is essentially an alias of gettext - it performs the same function. However, it isn't a direct alias (I don't think). It is implemented in and is specific to the framework. It searches for and returns a localization or translation of the string it is given. For more, see this blog post: http://www.eatmybusiness.com/food/2007/04/13/what-on-earth-does-a-double-underscore-then-parenthesis-mean-in-php-__/7/
In Kohana (version 3) the function is defined in system/base.php and is a convenience function to aid (as the other answers have mentioned) internationalization. You provide a string (with, optionally, some placeholders to substitute values into the finished text) which is then interpreted and, if required, a translation is returned.
Contrary to assumptions in other answers, this does not use gettext.
A very basic example would be (this particular string is already translated into English, Spanish and French in Kohana):
// 1. In your bootstrap.php somewhere below the Kohana::init line
I18n::lang('fr');
// 2. In a view
echo __("Hello, world!"); // Bonjour, monde!