Skeletron generalizes collections of lines to a specific spherical mercator zoom level and pixel precision, using a polygon buffer and voronoi diagram as described in a 1996 paper by Alnoor Ladak and Roberto B. Martinez, "Automated Derivation of High Accuracy Road Centrelines Thiessen Polygons Technique" (http://proceedings.esri.com/library/userconf/proc96/TO400/PAP370/P370.HTM).
You'd typically use it via one of the provided utility scripts, currently just these two:
Accepts OpenStreetMap XML input and generates GeoJSON output for streets using the "name" and "highway" tags to group collections of ways.
Accepts OpenStreetMap XML input and generates GeoJSON output for routes using the "network", "ref" and "modifier" tags to group relations. More on route relations: http://wiki.openstreetmap.org/wiki/Relation:route
The first two implementations of Skeletron used the "straight skeleton" of a polygon to find a generalized center, and ultimately didn't work very well.
The straight skeleton: http://twak.blogspot.com/2009/01/that-straight-skeleton-again.html
How it's useful for maps: http://aci.ign.fr/Leicester/paper/Haunert-v2-ICAWorkshop.pdf