Werewolves were servants of Morgoth Bauglir, bred from wolves and inhabited by dreadful spirits (fallen lesser Maiar or fëar of Orcs) imprisoned in their wolfish forms by Sauron. (Unlike normal werewolves in basic literature, these ones aren't first Man and then a wolf at night.)
They inhabited Tol-in-Gaurhoth which became known as the Isle of Werewolves.
The name werewolf appears to have been chosen because they were in essence sentient (but evil), and thus had a status similar to men rather than beasts — the word "were" in the word werewolf being from the Anglo-Saxon word were, meaning man, so the term were wolf can be translated to man-wolf.
The first werewolf was Draugluin at Tol-in-Gaurhoth, and the greatest wolf after him was Carcharoth, the guardian of Angband, and a descendant of Draugluin as all other werewolves were. Huan the Hound of Valinor, while also sentient, was not a werewolf, but a wolfhound. Werewolves were thought of by Sauron, who was their lord, and took the shape of a great wolf himself at least once.
Gandalf suggests in his talks with Frodo after the Ford of Bruinen that werewolves survived into the Third Age, and makes a distinction between them and Wargs. The latter though might simply be descended from werewolves, as they could speak, suggesting they had fëar.
Werewolves were not shapeshifters, and were always in the form of beasts. The fangs of Carcharoth were venomous, though it is not known if all werewolves had venomous fangs.
Werewolves are similar to Wolves and Wargs, and were quite large even compared to Wargs. Known to be stronger and faster than the famous Warg race, they were also as intelligent as a mortal man which made them capable of negotiating and communicating with others. Thus they were able to speak the Dark Speech, Westron, and the Elvish Languages.
Races of the Creatures of Arda