"For my definition of historical fiction, I've always thought that authors should be writing about events that have passed out of living memory and that have stopped influencing the immediate present. For example, I would consider fiction set in the 1940s (and I suppose the 1950s) to be historical fiction. Someone born in the middle of WWII would already be 70 years old but would not have any memories of that time - so it's safe to say it is passing out of living memory. I also think there's something to be said for a time having noticeably different customs and behavior from our own. The 1940s and 50s are very different in terms of behavior and values than say the mid to late 1960s that bear more resemblance to our own time.
I run into trouble when I start to think about the difference between "genre" historical fiction and "literary" historical fiction. I would say that the biggest difference is character. Take two recent novels (again) about WWII. "Mr. Churchill's Secretary" and "Life to Life" are both set in London during the Blitz. "Mr. Churchill's Secretary" is definitely thought of as historical fiction - I think this has a great deal to do with the fact that the setting is integral to the interest/enjoyment of the novel. You read it because you want to experience what life was like in London during WWII and see the character interact with famous historical figures. "Life after Life" also follows a young woman during the Blitz but she doesn't interact with any famous people and the purpose of the novel is to explore deeper questions about the meaning of life. So in a sense it could be set during any time of war and danger to civilians.
As for all of those time-slip and split time period novels that have come out lately, I consider them historical fiction since the story line set in the past is integral to the overall plot and usually involves some character attempting to understand the past. Very meta! :)
So to sum up, historical fiction is fiction set in a time that has passed out of living memory and whose purpose is to give some sense of the larger historical undercurrents and/or personalities of the time."
Looking back at my answer, I can see that it's not perfect. For example, under my definition you could write a historical novel that's both "genre" and "literary."
I would love to hear from other bloggers who were contacted or anyone else who wants to put in their two cents!