When using the optical zoom, the focal point is adjusted by moving optical lens back and forth and images are shown physically enlarged. Therefore, there is virtually no deterioration in the image quality.
When using the digital zoom, digital images captured by the image sensor of the camera are enlarged by digital signal processing. These signals are created by estimating the data from the surrounding pixels. Therefore, as the magnification level increases, signals to be estimated increase and image quality is deteriorated.
NOTE: Most cameras can be set to use optical zoom only or to use both optical and digital zoom for shooting.