From the source:
/*
mnemonic.js : Converts between 4-byte aligned strings and a human-readable
sequence of words. Uses 1626 common words taken from wikipedia article:
http://en.wiktionary.org/wiki/Wiktionary:Frequency_lists/Contemporary_poetry
Originally written in python special for Electrum (lightweight Bitcoin client).
This version has been reimplemented in javascript and placed in public domain.
*/
So it converts every 4 characters to three words from that list.