The letter å (uppercase, Å) is used in Scandinavian alphabets to represent variations of what English speakers would identify as the vowel sounds of short and/or long 'O' ('cot' and, approximately, 'coat'). There is significant variation in pronunciation between and even within languages.
Alphabets that use the grapheme å include Swedish, Danish, Norwegian, Finnish, Greenlandic, those of the Sami languages, North Frisian, Walloon, Emiliano-Romagnolo, Chamorro, and Istro-Romanian. Some languages, such as Chamorro, do not regularly recognize it as a separate grapheme in print, and others, such as Finnish and Greenlandic, use it only in loanwords.
Å is generally used for subtle variations on the IPA sounds /ɔ/ and /o/, often as long vowels (/oː/ in Swedish and /ɔː/ in Danish and Norwegian). It is frequently subtly dipthonged.
It originated as a replacement for the digraph 'aa', and in some languages, such as Norwegian, it is still common to see 'aa' used in the names of people and places; it is also still common in the Nordic languages to use 'aa' in place of å in any situation in which one cannot use å, such as when using an English keyboard.
The little 'o' on top of å is not a diacritic mark, and cannot be applied to other letters. However, it was historically constructed after the same fashion as the letters ä and ö, which are derived from the ligatures Æ and Œ -- the 'E' was detached from the 'A' and the 'E', and replaced with two dots above the first letter (it is worth noting that at this point these letters did not represent diphthongs). Likewise, when 'aa' started to take on an 'O'ish sound in Swedish, the letter 'å' was invented. It's first recorded use was in 1541, in Gustav Vasa's government-backed publication of the Bible.
Å's official introduction into other languages is somewhat recent. Finland essentially borrowed the Swedish alphabet, and it has kept å since it was introduced in the 1500s (although it is essentially useless, and is not used in Finnish words; it is known as the 'Swedish o', AKA 'ruotsalainen å'). Norway and Denmark did not officially add å into their alphabets until 1917 and 1948, respectively. Greenlandic does not include å in its alphabet, but does use it in extended character sets; this alphabet was set up in 1973, although å was no doubt quite familiar to the Greenlanders before this.