This is one of the power tools, the 'Paste Into' command. It differs from the normal 'Paste' command. The content of the clipboard is put into the current selection while keeping the original proportions. The marquee lines show the shape of the pasted image. It can be moved to position the portion wanted to show through the selection. The selection is floating and can be transformed using the 'Transform ...' command. As long as the image area is selected (not anchored) it can be changed.