According to TV Tropes, a "fusion fanfic" is "a variety of crossover fic where two or more works are merged together into one (usually) cohesive setting." This is different from a normal crossover, in that a "fusion" usually aims at a much more thorough and permanent cohesion of the two works that fundamentally changes at least one of the realities, while a standard "crossover" tries to maintain both realities as intact as possible.

A funny example on that page "fuses" the cute-animal "Hello Kitty" into the mecha-scifi "Warhammer 40K," such that neither original universe continues to exist, and instead there is a total merger of the two, with the characters of one mostly replacing the characters of the other.

However, what I'm seeing now is that fewer people seem to regard "fusion" as necessarily a kind of crossover. Instead, people seem to see putting a single fandom into a different genre as a "fusion," or putting a single character from one fandom into another without explaining how she got there as a "fusion" (whereas a traditional crossover would have some explanation).