Retribution Aura is an instant cast aura that surrounds the paladin. If an enemy hits the paladin or a party member within 40 yards of the paladin, the attacker will take Holy damage. Imagine a group version of Thorns (These 2 effects will stack!). The aura gains an additional 1 damage per 30.3 of the paladin's spell power.
During 3.0.x, Retribution Aura was the Aura of choice for the Retribution Paladin thanks to the major overhaul of the class in the lead up to the Wrath of the Lich King expansion. Fully talented through Sanctified Retribution and Swift Retribution all party and raid members received a 3% increase to all damage dealt and 3% melee, casting and ranged haste respectively while under the influence of the paladin's Retribution Aura. In 3.1, these talents were changed so that these bonuses would be given to all party an raid members while under the influence of any of the paladin's Auras.
Retribution Aura is affected by +spell damage.
Retribution Aura can work well for tanks, as it is a permanent costless source of threat. As it works "on-hit", it is especially suitable for multi-mob scenarios, as they will hit a lot for (usually) little damage per hit.
Since there is no resistance to Holy damage, the paladin's enemies will always take full damage (unless they fully resist it by the base miss chance).
The haste bonus provided to party and raid members by Swift Retributionwill not stack with a Balance Druid's Improved Moonkin Form, i.e. if both are present in the raid, only 3% haste will be received by members, not 6%. It is worth remembering that even though the additional haste will be canceled out, the +3% damage is still active. Back in 3.0.x, having a second Retribution Paladin specialized into Sanctified Wrath in the party or raid sometimes made it worth selecting a different aura for the group's or raid's benefit.
Hotfix (2009-05-22): "The bonus damage from spell power on the Paladin ability Retribution Aura has been reduced by half. The threat generated by that damage has been doubled per point of damage to keep the threat generation about equal to before."
/Patch 3.0.2 (14-Oct-2008): Damage increased and now gains damage based on Holy spell power.