This switches between Sentence mode and Paragraph mode. In other words you can choose to view your text files with each row of the display taking up a sentence or a paragraph.
Likewise, you can make an dual aligned text by interspersing either paragraphs or sentences. The other functions (e.g. joining, splitting) work in the same way in either mode.
The various texts in your aligned text will have different colours associated with them. Colours can be changed using the button.