Today’s digital camera’s dynamic range is comparable to slide film or about five F stops. Over at Liminous-Landscape, they discuss dynamic range as follows in their Understanding Histograms tutorial.
The digital imaging chip in your camera is very similar to colour transparency film when it comes to its sensitivity to light.
Like slide film, if a part of the image receives too much light it becomes burned out, and if too little light it is rendered as black. A recognizable image is only recorded if the light hitting the chip falls within a range of about 5 F stops. (Remember — each F stop is a doubling or halving of the amount of light hitting the film). With digital things are much the same and even the dynamic range is about the same as for slide film; about 5 stops. Also keep in mind that the total range of brightness values encountered in the real world is only about 10 stops — from the dimmest light that you can read in to the brightest beach or snow scene in which you might find yourself).
With a potential of 10 F stops of light information and shooting with a camera that can only interpret five F stops means that a lot of shots will have areas that are either under or over exposed. There are ways to get around this problem using flashes or split neutral-density filters, but these methods have their limitations.
Another way to increase the effective dynamic range of a camera is to shoot two or more shots of the same scene, and blend them in Photoshop. This technique works well of a lot of situations, but is rather tedious. Luminous-Landscape has a tutorial called Blended Exposures that walks through this process.
Potentially even better (or at least faster), is to use Photomatix software to blend exposures automatically — and for free (Photomatix Basic). I’ve yet to try out Photomatix, but some of the examples on their site look promising. I’m looking forward to trying this software out.