The iTunes Library files store information about your iTunes library, such as what songs are available for iTunes to use, but they do not store your actual song files.
The two iTunes Library files are:
iTunes Library ("iTunes Library.itl" in Windows) is a database of the songs in your library and the playlists you've created. Some song-specific data is saved in this file. If you delete the file, iTunes creates a new, empty copy when you open the application, but any playlists, song ratings, comments, or other information you created will be lost. The iTunes Library file is only used by iTunes.
iTunes Library.xml contains some (but not all) of the same information stored in the iTunes Library file. The purpose of the iTunes Library.xml file is to make your music and playlists available to other applications on your computer. If you delete the file, iTunes creates a new copy from the iTunes Library file.
Your iTunes Library file may become damaged and cause iTunes to become unresponsive. The "iTunes Library.xml" file may be used to re-create a new iTunes Library file.
Re-creating the iTunes Library file is a very specific troubleshooting step which you should only perform if you have been directed to do so by a specific troubleshooting article.