HP are your hit points or stamina and if a folk attacks you, you will lose this health.
The amount of HP you have, increases with the level of your character. If your HP gauge reaches zero then you will automatically be taken to a screen giving you the option to reload a previously saved game or to continue. If you continue you will spawn back in Doolin and fail any quests you may be doing. You may retake quests if this happens and you will also be able to keep any items you have gained.
There are a few ways to replenish your health, with Life Drops, at Portals or by leaving the realm you are currently in. Keats can become invunerable for a short time in his transcended state, this means that folks will not be able to take hit points off you.