My Contacts contains the contacts you explicitly put in your address book (via manual entry, import or sync) as well as any address you've emailed a lot (we're using five or more times as the threshold for now).
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Suggested Contacts is where Gmail puts its auto-created contacts. If you prefer tighter control of your address books, you can choose to disable usage-based addition of contacts to My Contacts (see the checkbox in the screenshot above). Once you do this, no matter how many times you email an auto-added email address it won't move to My Contacts.
Read the complete article at the official Gmail blog.
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