This week's book giveaway is in the OCPJP forum. We're giving away four copies of OCA/OCP Java SE 7 Programmer I & II Study Guide and have Kathy Sierra & Bert Bates on-line! See this thread for details.
First, an object is created for the string literal "xyz", which acts as a reference to the String object. Then that reference "xyz" is passed to the String constructor, which is called with the new operator, thus creating a second object.
Put another way, "xyz" refers to an object, and new String("xyz") refers to another object.