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 November 2016, the Skype Translator feature does machine translation of chat messages in over 50 languages. For voice recognition and spoken interpretation, Skype supports Arabic, Chinese, English, French, German, Italian, Portuguese ,Portuguese Brazilian, Russian and Spanish

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

See the Skype Translator support page on how to setup Skype Translator  :

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

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.

Video demo of Skype Translator Preview

Microsoft announced that the Skype Translator features will be rolled out to regular Skype desktop users by the end of summer 2015. Microsoft has announced this was completed in a blog post on January 13 2016.

How to install

Download the latest Skype for Windows client for Windows XP and higher at http://www.skype.com/en/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).

Other information

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