[eluser]theprodigy[/eluser]
another difference is that the model is an extension of CI, and therefore has access to basic CI functionality, where the library is an outside class. In order to gain access to CI, you have to use the get_instance() function.
Other than that, what @toopay said is pretty much correct. The model is used for database connections and business logic, where the library is more of an object you may use for mere functional means.
Example:
Your model may hold the functions for your checkout system (shopping cart, catalog, etc)
Your library would be an easy interface to Paypal, that you would use inside your model or controller.