From Diablo Wiki
A town is an area within a Diablo game that is free of monsters, and where PvP combat is impossible. A sanctuary as well as a place to gather supplies for adventures ahead. Cities in Sanctuary are not per definition "towns", this term is saved primarily for the game term.
The Diablo games have a tradition to circulate around towns. Towns acts as a central place in an area where no hostile actions can take place, and where adventurers can repair items, store their gear in a stash and barter or gamble for new ones. In Diablo 1, it was the entire game circulating around Tristram, and in Diablo 2, it was one town per "Act".
Blizzard has released concept art and a world map that shows off many of the towns in Diablo III, but just how these will be integrated into the actual gameplay remains to be seen. There are no screenshots of a character in a town, or conducting trade with an NPC.
At the Blizzcon (October 2008) demo, new characters started off in a rough, very small encampment outside of New Tristram. There were two NPCs there, but neither was a merchant, and only Captain Rumford could be spoken to. There were no structures or even any tents in the camp; just a bonfire loaded with corpses, so that area could not be considered a "town" in any sense of the word.
Towns and Cities
The D3 Team has not confirmed that towns will be set up as they were in Diablo II, but it certainly seems likely, judging by the concept art of cities, and their general remarks about how the game will be structured.
One specific comment about towns came up during the April 2009 Blizzcast, when Jay Wilson was asked if characters would be able to enter buildings in towns. 
- Will buildings and towns be enterable, like Atma's Bar was from Diablo 2’s second act?
- Jay Wilson: There probably will be some buildings, my guess is not too far off from how many were enterable in Diablo 2. Most towns we don’t make all the buildings enterable, it’s just a ton of art to create for very little reason. Most people tear through the towns at lightning speed, so they don’t have a desire to go into the individual buildings. But we do have some specialty buildings that I’m sure we’ll go inside of throughout the quest course of the game.
From Jay's answer, "most towns we don't make all the buildings enterable," it's fairly clear that there will be towns with buildings set up much as they were in Diablo II.
Towns in Diablo III
See the specific towns pages for concept art, map coordinates, plot info, and more.
Full list of all known towns.
Towns in Diablo II
Towns in Diablo I
|Diablo III Levels [ ]|
|Act I: Khanduras||Act II: Borderlands||Act II continued||Act III: Barbarian Lands|