The Furnace is a crafting station used mainly to smelt ores into bars, to create ore bricks, and to craft Glass and certain glass items from Sand, but can also be used to craft other items e.g. weapons. It is also a light source. The Furnace smelts all Pre-Hardmode ores besides Hellstone, which must be smelted in a Hellforge.
The Furnace is also sold by the Merchant when he is in the Jungle biome.