An illiterate person cannot read or write at all, for all practical purposes. A functionally illiterate person can read and possibly write simple sentences with a limited vocabulary, but cannot read or write well enough to deal with the everyday requirements of life in their own society.

For example, an illiterate person may not even understand the written words cat or dog, and may not even recognize the letters of the alphabet. A functionally illiterate person may well understand these words and more, but cannot read well enough to understand the things they must read in order to get by in their daily life, such as job advertisements, past-due notices, newspaper articles, complex signs and posters, etc.

While pure illiteracy has approximately the same characteristics worldwide, the characteristics of functional illiteracy vary from one culture to another, as some cultures require better reading and writing skills than others. A reading level that might be sufficient to make a farmer functionally literate in a rural area of a developing country might qualify as functional illiteracy in an urban area of a technologically advanced country.

http://en.wikipedia.org/wiki/Functional_illiteracy