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We don't know for sure, but in one of the 'Avatar' guidebooks it is stated that the mechanics of Na'vi reproduction are similar to that of other Terran animals. By that, we can assume that they probably have sex like we do to reproduce, but James Cameron hasn't confirmed anything.

In fact, Cameron actually joked in an interview that the Na'vi 'male carries about 100 eggs in his mouth for several months'. However, egg-laying is an amphibian and fish trait that I do not think the Na'vi possess. They would most likely be placental creatures as they have belly-buttons.

The female Na'vi also have breasts, though we don't know if they serve any mammalian function in suckling young.

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