Jewish tradition generally takes this passage (Gen 1:26-27) to suggest that humans uniquely resemble God in the sense that we have a moral dimension: a capacity to know right from wrong, to choose between the two, and to be co-participants in creation (in its ongoing sense) both spiritually and physically through the moral choices we make. Usually this capacity is understood to be intuitive in origin (per the first creation account), but ultimately intellectual and experiential as well (per the second account, where acquisitive desire, rationalization, and resulting shame at our inadequacy enter the human moral vocabulary).
The Hebrew here doesn't suggest a concrete physical resemblance; "tselem" (b'tselem elohim, "in the image of the Master") derives from the abstract term tsel, "shadow," "reflection," "phantom"; while the immediately following word usually translated as "likeness" (kidmutanu) derives from demut, another abstract, hard-to-translate conceptual term meaning, roughly, "pattern." Neither word suggests corporeality. In passages where "images" and "likenesses" in the physical sense are referred to (e.g. the Second Commandment), the terms generally used are pesel ("idol", "graven image") and temunah (roughly, "record").
As a historical footnote, the phrase "made in god's image" was also commonly applied in many Ancient Near Eastern cultures to rulers, suggesting that they had been granted a special mission, and authority, over their subjects analogous to the god'(s') benevolent rule over humans. So in the context of Genesis specifically, this phrase could also be interpreted as a uniquely Hebrew twist on that concept, suggesting that God has designated humans as stewards of creation. That would be in keeping with the style of this first creation account, which is really not very folkloric or anthropomorphic, but rather didactic, order-focused and "priestly" (and also likely relatively late, as most other references to creation and Sabbath in the Hebrew scriptures suggest no awareness of the "seven days" theme).
It just popped into my head b/c there's a stack of crayon boxes on my desk.
