Again, you should spin the axle, not the entire wheel - much easier to check, but it definitely needs an overhaul. Have a shop do it or tackle it yourself if you are willing to buy any tools you don't have and follow the directions to be found in various places - repair manuals, Sheldon Brown's site, Park tool, Google "bicycle hub overhaul."
Just in case - Do you have to overhaul it? No, you can ignore it and it will get worse, eventually needing more parts or an entirely new hub or wheel.