The Village Virus is a concept invented by Guy Pollock that explains how people who move to small towns eventually lose their ambition and settle into a life of quiet mediocrity. As he puts it himself, "The Village Virus is the germ which—it's extraordinarily like the hook-worm—it infects ambitious people who stay too long in the provinces" (13.1.24).
Guy goes on to tell the story of his own journey to Gopher Prairie: he arrived as an ambitious young man and eventually found himself settling down and not wanting to take on the challenges of a big city.
The issue seems to be that in small-town America, the pressure to conform is much greater than it is in a big city. Everyone is watching and sniping at everyone else, and any kind of behavior that deviates from a bland norm gets punished immediately. Eventually, the pressure becomes too great, and people just tend to give in. It's kind of like high school, except instead of jocks and mean girls, you have cranky old Christian ladies and unimaginative, cookie-cutter men.
When Guy finally realized how mediocre he'd become, he thought: "Then I found that the Village Virus had me, absolute! I didn't want to face new streets and younger men—real competition. It was too easy to go on making conveyances and arguing ditching cases" (12.1.32).
Guy basically says that the Village Virus is the thing that might eventually suck away Carol Kennicott's ambition and make her just one more faceless small-town housewife. He hates the fact that this is what happens to people, but at the same time he's completely given in to it. It's this exact kind of surrender that Carol fears more than anything in the world, and she does everything she can to resist it.