For any Skype contact in Skype for Windows  you can enable translation and select what language that person speaks and what language that person writes. You can also select what languages you speak and write when communicating with that person.

As of June 2015, the Skype Translator Preview does machine translation of chat messages in over 50 languages. For voice recognition and spoken interpretation, Skype supports English, Spanish, Italian, Chinese, French and German.

When having a voice conversation with another Skype user with translation enabled, Skype recognizes the speaker's voices, transcribes the spoken words and shows the transcribed text in the chat window. The text is then translated and shown in the chat, followed by a machine speaking the translated message. It works in near real time and after the call, the transcript of the call can be saved.

Microsoft released Skype Translator Preview in late 2014 as a limited preview and then made it available to the wider public in 2Q 2015. The At-Large Technology Taskforce Working Group demoed the Skype Translator Preview on its Technology Taskforce meeting 2015-05-18 call.

...

The latest version of the regular Windows client now has Skype Translator built in.

Watch the Youtube video by Microsoft showing how you can use Skype Translator in your regular Skype

Video demo of Skype Translator Preview

How to install

Skype Translator Preview is only available from the Microsoft App Store for Windows 8.1 (and the soon to be released Windows 10) for PCs and mobile devices running the Windows 8.1 OS.

A download link to the Microsoft App Store can be found on the Skype Translator Preview website Download the latest Skype for Windows client for Windows XP and higher at http://www.skype.com/en/translator-preview/ . You therefore need a Microsoft account to download the application.

Also, the preview requires you to link the Skype account to the Microsoft account so that you must use the Microsoft account to log into Skype Translator Preview.

/download-skype/skype-for-computer/

You can use all of the features of Skype Translate Preview to call and chat with another user running any Skype client (on iOS, Android, Windows, Mac, Linux, etc).

Features

For any Skype contact in Skype Translator Preview, you can enable translation and select what language that person speaks and what language that person writes. You can also select what languages you speak and write when communicating with that person.

As of June 2015, the Skype Translator Preview does machine translation of chat messages in over 50 languages. For voice recognition and spoken interpretation, Skype supports English, Spanish, Italian, Chinese, French and German.

...

Features

The machine translation is not perfect, however the ability to have a near real time conversation in another language is impressive.

Other information

There is also a Infographic describing how Skype Translator works: http://news.microsoft.com/download/presskits/skype/docs/SkypeTranslatorInfo.pdf

...