The green Fatigue bar on the HUD display indicates your character's rested status. A character's fatigue indicator will decrease when they perform exercises such as running, jumping, or attacking, indicating roughly how tired they are.
Fatigue plays a part in many actions, so the lower a character's Fatigue gets, the more difficult it becomes to fight, cast spells or do anything else effectively. A low fatigue will even reduce the height of your jumps. Surprisingly, even Mercantile is affected by fatigue. Similarly, with Fatigue raised above the derived total, skills become more effective.
Fatigue will regenerate over time as the character performs less strenuous actions, and can also be restored with Restore Fatigue potions, items, or spells. You can also wait or sleep for 1 hour to restore your Fatigue.