Twilight

"The dark clouds of dusk cover this land... This drape of shadows is called...twilight. In this twilight, those who lived in the light...become as mere spirits...it is a place...where the dark ones and evil creatures dwell..."

- Faron

"Twilight covered Hyrule like a shroud, and without light, the people became as spirits. Within the twilight, they live on, unaware that they have passed into spirit forms... All the people know now is fear... Fear of a nameless evil..."

- Princess Zelda

Light in Hyrule is sustained by the four great Spirits of Light, who act as guardians for their respective provinces. During the events of Twilight Princess, Zant, the Twilight King, steals the Light from the Light Spirits by creating a dark fog composed of light-absorbing shadow crystals similar in nature to the one encountered in the Palace of Twilight. The kingdom of Hyrule is slowly overtaken by twilight as its light vanishes in each province.

Once overtaken by the twilight, the inhabitants of the Light lose their physical bodies and turn into spirits, unaware of their current state. Furthermore, the Shadow Beasts have the ability to change them into monsters.

Hyruleans normally cannot enter areas engulfed in twilight, unless a twilight creature draws them in. Once someone has entered the twilight, it is often impossible to escape or recover. Only with the help of a member of the Twili race can a lost soul or anything trapped in the twilight escape. In each province, the light of the Light Spirits needs to be recovered from the shadow insects in order for them to be revived. Once the Light Spirits regain their power, the twilight is lifted and the inhabitants return to normal.

However, there are a select few that can survive in the twilight without becoming a lost soul. Bearers of the Triforce can usually withstand the effects of the twilight. Link, bearer of the Triforce of Courage, transforms into a wolf and Princess Zelda, bearing the Triforce of Wisdom, maintains her normal physical form.

Not all beings are turned into spirits however. The enemy creatures that Link encounters are turned into "shadow creatures" within the twilight. Bulblins, along with Keese, Deku Babas and Kargaroks are just a few creatures that change under the influence of the twilight.

Twilight Realm
The perpetual twilight of the Twilight Realm is different in nature compared to the twilight produced by Zant. The latter exerts a corrupting influence over Hyrule, while the former is comparable to the twilight encountered naturally in Hyrule during sunset. The Twilight Realm itself is described as a beautiful world, and its inhabitants, albeit exposed in the twilight, as gentle, pure-hearted beings.

Trivia

 * According to the original Japanese text, Midna mentions that Link, being a Hyrulean, should avoid contact with the dark fog, possibly implying that the twilight of the realm is harmless.
 * If the "Early Master Sword" glitch is utilized, and Link then returns to areas covered in Twilight, he can switch between his wolf and human forms freely. Furthermore, the entire Sacred Grove is still covered in light when the glitch is utilized, even though the rest of Faron Province is corrupted.