http://www.adventuregamestudio.co.uk/manual/Interaction%20events.htm
QuoteUse inventory on hotspot
occurs when the player clicks on the hotspot while in the "Use inventory" mode (cursor mode 4). You can use the "If inventory item was used" conditional to distinguish which item they used.
If that's not explanatory enough, the "Use inventory" mode is when the player has an inventory item selected (on the cursor). So it means "when the player uses any item (from the inventory) on..."
For example, you could add a "use inventory on" interaction on a door so the player could use a key on it.