A sixteen bit microprocessor chip used in early IBM PCs. The Intel 8088 was a version with an eight-bit external data bus.
The Intel 8086 was based on the design of the Intel 8080 and Intel 8085 (it was source compatible with the 8080) with a similar register set, but was expanded to 16 bits. The Bus Interface Unit fed the instruction stream to the Execution Unit through a 6 byte prefetch queue, so fetch and execution were concurrent - a primitive form of pipelining (8086 instructions varied from 1 to 4 bytes).
It featured four 16-bit general registers, which could also be accessed as eight 8-bit registers, and four 16-bit index registers (including the stack pointer). The data registers were often used implicitly by instructions, complicating register allocation for temporary values. It featured 64K 8-bit I/O (or 32K 16 bit) ports and fixed vectored interrupts. There were also four segment registers that could be set from index registers.
The segment registers allowed the CPU to access 1 meg of memory in an odd way. Rather than just supplying missing bytes, as most segmented processors, the 8086 actually shifted the segment registers left 4 bits and added it to the address. As a result, segments overlapped, and it was possible to have two pointers with the same value point to two different memory locations, or two pointers with different values pointing to the same location. Most people consider this a brain damaged design.
Although this was largely acceptable for assembly language, where control of the segments was complete (it could even be useful then), in higher level languages it caused constant confusion (e.g. near/far pointers). Even worse, this made expanding the address space to more than 1 meg difficult. A later version, the Intel 80386, expanded the design to 32 bits, and "fixed" the segmentation, but required extra modes (suppressing the new features) for compatibility, and retains the awkward architecture. In fact, with the right assembler, code written for the 8008 can still be run on the most recent Intel 486.
The Intel 80386 added new op codes in a kludgy fashion similar to the Zilog Z80 and Zilog Z280. The Intel 486 added full pipelines, and clock doubling (like the Zilog Z280).
So why did IBM chose the 8086 series when most of the alternatives were so much better? Apparently IBM's own engineers wanted to use the Motorola 68000, and it was used later in the forgotten IBM Instruments 9000 Laboratory Computer, but IBM already had rights to manufacture the 8086, in exchange for giving Intel the rights to its bubble memory designs. Apparently IBM was using 8086s in the IBM Displaywriter word processor.
Other factors were the 8-bit Intel 8088 version, which could use existing Intel 8085-type components, and allowed the computer to be based on a modified 8085 design. 68000 components were not widely available, though it could use Motorola 6800 components to an extent.
Intel bubble memory was on the market for a while, but faded away as better and cheaper memory technologies arrived.