It means something like 'tiny', 'miniscule', or 'teeny-weeny', and can be used to describe animals, buildings, or just about anything that's much smaller than average. You wouldn't usually use it to talk about people though, other than perhaps a particularly tiny baby.
If we take a closer look at the origin of the word, its second half – liten – is the Swedish word for 'small'.
Liten is often a confusing word for language-learners as its endings change depending on the (grammatical) gender and number of what it's referring to. There's liten/litet, used with 'en' and 'ett' words respectively in the indefinite form, and lilla for both genders in the definite form, as well as små which is used in the plural. If you already know English, you can probably guess that små and liten share their origins with the words 'small' and 'little', but while in English the variants are used interchangeably, in Swedish there are specific rules to follow. Pytteliten follows the same rules, so you'll see different forms such as pyttelilla and pyttesmå.
Another form is the adverb pyttelite, which comes from the adverb lite (a little). This is used to describe verbs, while pytteliten and its various forms describe nouns. Pyttelite might be used in a sentence along with the verb it's describing, so you might say you speak pyttelite Swedish or that you're pyttelite interested in something, but it can also be used in contexts where the verb is implied. So if someone asks you if you speak Swedish, you can simply reply pyttelite. In this case, pyttelite is linked to the implied verb 'to speak' rather than the noun 'Swedish', so you don't need to change the ending.
As for the origins of the first half of the word, pytt used to be used in other contexts to mean 'small' in Swedish, both as an adjective and as a noun meaning 'little person'. So in pytteliten it's an intensifier, strengthening the meaning in the same way as jätteliten or mycket liten – translated literally it means 'small-small'.
But wait, is there any connection to the popular Swedish dish pyttipanna, we hear you cry. This is actually a disputed subject among Swedish linguists. Some argue that yes, the pytt here refers to the 'small things' (diced potatoes, onions, and meat) that make up the meal, but others claim it comes from the verb putta, which today means 'to push' or 'to putt' in the golfing sense, but used to mean the same thing as English 'to put'. According to that explanation, pyttipanna literally describes 'putting [ingredients] in the pan'.
Det finns en pytteliten stuga i skogen
There is a teeny tiny cabin in the wood
Pratar du svenska? Åh, pyttelite…
Do you speak Swedish? Well, a tiny bit…