What is the EU compensation regulation EU261 for cancelled flights?

The EU in 2004, passed regulation EU 261 to protect passengers against severe flight disruptions such as long delays, cancellations, missed connections and flight re-bookings. The exact compensation amount is dependent on the flight distance and delays of over 3 hours, cancellations, or being denied boarding due to overbooking. The regulation went into effect as of February 2005.