Memory Dust is a special magical powder of unknown origin that can erase the memory of magical and non-magical beings. It takes affect after the being goes to sleep and then awakens. The powder is made by whitelighters.
History
It is first mentioned in the Season 2 episode P3 H2O, when Patty Halliwell's former whitelighter Sam Wilder used it to erase the memory of the Charmed Ones in order to protect them from an impending attack by the Water Demon that killed their mother at Camp Skylark. However, the sisters incorrectly identified it as something Patty had given Sam.
The victim's memory can simply be restored if a weak enough dosage is used - a weak dose was given to the sisters, ultimately allowing them to regain the memory of the Water Demon. Phoebe Halliwell then used the dust on the kids at the Camp in order to keep them from entering the water, to protect them from the demon that killed their mother. She doused them with the dust and says "Land good, water bad".
Two years later, Leo used the dust to erase the memories of Phoebe's fellow jurors after she was forced to expose magic to them.
A few years after that, neophyte whitelighter Kyle Brody used the dust to erase the memory of Inspector Sheridan who was determined to expose the Halliwell sisters. However, if Sheridan's memories were triggered in any way, her memory would return. By the time of her death, Sheridan's memories did in fact seem to be returning after being exposed to magic several times.