Word wants to make it easy to format complicated lists, but having two separate approaches to creating those formats doesn't necessarily assist with the task.
If you click on the multilevel list icon in the Word 2007 ribbon, you'll be offered a bunch of pre-defined list formats. If you want to create your own, though, you have to choose between two menu options — a new multilevel list or a new list style — that don't seem particularly distinct.
To ease the confusion, Microsoft's Word team blog offers up a detailed explanation of the differences. In a nutshell? The multilevel lists feature is designed for backwards compatibility with older Word versions, while the list styles approach is designed to make it easier to copy formats between documents and edit list formatting independent of a particular list in your document. Hit the full post for more detail on list structure than you might have thought possible.
Multilevel Lists vs List Styles [The Microsoft Office Word Team Blog]