Weapons, tools and clothes wear out: a weapon or tool with each blow or harvest, clothing or armour when you take hits. The bar under each worn item (C key, Bag & equipment tab) shows its durability.
Almost worn out: a message warns you when 10% durability is left.
Broken: the item stays in your bag but is useless (no bonus, the tool no longer works) until it is repaired.
Repair: Hilde repairs weapons, tools, metal and leather; Pïo repairs clothes. The price depends on the wear. Talk to them: the option appears when you have something damaged.
Salvage (♻️ button in the bag): near a salvage bench (6 logs, 4 stones, 2 iron) or Hilde, you destroy an item to recover part of its materials. The more worn the item, the less you get back.
A damaged item cannot be sold, dropped or stored in a chest: repair or salvage it first. Legendary items and those from the ingot shop are much sturdier.