In addition to Gabriel Garcia Marquez, does anyone have any suggestions in this category?

  It's hard to explain, but it is definitely not fantasy. It's real world, contemporary people and situations, but magic will enter into it. Most I've seen deal with Mexico, or Native Americans. "The Hummingbird's Daughter" is a recent good example.

Isabel Allende and Alice Hoffman. I especially liked Blackbird House by Hoffman.

It's also called fantastical realism (or at least I've seen it referred to as that) and it's my favorite style.  Try Italo Calvino - Invisible Cities is a good one.  Calvino and Garcia Marquez are too of my favorite authors.  
Aldo Palazzeschi's Man of Smoke might interest you, as well.

Should say  "two" not "too."  That's what I get for typing fast!  :)

Laura Esquivel

Angela Carter

Jeanette Winterson

Bless Me, Ultima by Rudolfo Anaya; I especially enjoyed listening to it on CD because of the dialect and accent.

Haruki Murakami - he's a great Japanese author.  I've read Sputnik Sweetheart, South of the Border West of the Sun, and Norwegian Wood, which were all very good.  However, Norwegian Wood is not "magical realism" but the others are and he's written many others.

I second Isabel Allende. I love all of her books and Haruki Murakami

Try "Peace like a river" by Leif Engler.  I loved it!!  His language is absolutely beautiful.  I second Alice Hoffman as well, especially "Seventh Heaven".

Vicky

Sarah Addison Allen.  Loved Garden Spells.

ETA: Of course, I also love Jeannette Winterson, especially The Passion, and Gabriel Garcia Marquez.

Paolo Coelho - starting with The Alchemist. Once again, a South American writer. He's great.

I LOVED Lian Hearn's Otori series! 

One book I finished reading recently and qualifies for this category is The Woman who Lives in the Earth by Swain Wolfe.  I didn't really love it, but I didn't hate it either. 

Has anyone recommended Charles DeLint?  A little more toward fantasy in some of his work, but still within the genre IMHO.  If you want to try, look for Greenmantle or Moonheart.

I love both Charles deLint and Lian Hearn...all great suggestions!

He may be considered more of a surrealist, but Jorge Luis Borges is really, really fantastic.

I second Angela Carter.  Her books changed my life.  The Bloody Chamber, Nights at the Circus and Wise Children in particular.

Another one would be The Fifth Life of the Catwoman - but I can't recall the author. Absolutely FANTASTIC book.

Another idea is Everything is Illuminated by Jonathan Safron Foer, and the History of Love by his wife, Nicola something, Krauss maybe?

I actually dislike Magical Realism.