Hired Nicomo Cosca, famed soldier of fortune
Literature (with a capital L*) is everything in a cultural canon, from the earliest classics (in the case of Western Literature) like Homer and Hesiod to more recent modern works. Literary Fiction then, as I understand it, attempts to extend Literary canon by writing stories, books and poetry that is up to current (academically defined) canonical standard. The kind of stuff that, like the classics, is excellent fodder for academic analysis and interpretation. So... by writing Literary Fiction, one is attempting to write what will be considered Literature by academics.
Of course, this is the broadest possible definition and it might almost seem useless in that case, but I think of it as a starting point. It means that no matter what the discussion (usually one concerning quality, theme, or influence/effect), nothing is left out initially. This definition is the basis for the critical inquiry, which can then subsequently build its own criteria to include or exclude works.
The advantage of this broad definition is also that it is impervious to time. You mention yourself Aristotle extolling plot as the hallmark of quality, whereas in our time, fiction driven by plot is usually thought less of. Defining literature as the works that are good means this definition is constantly in flux, and it ends up being more an example of what society at that point in time considers good fiction. This can have its own use, but it doesn't work very well as a a basis for criticism. I've read Aristotle's Poetics three times as part of my studies, and I find it fascinating as the progenitor of my field and as an example of what the foremost (by virtue of being the only) literary critic of that time considered good fiction. But it's not really useful as a foundation for critical theory, as opposed to Nothrop Frye's approach in The Critical Path, where working off my aforementioned definition he is able to make the most remarkable observations on the structure, development, and influence of literature throughout history.
@Elvira and @Peat, what would you consider social biases that influence your reading or choice of reading material? Can you be as specific and exhausting as possible? I would like to delve into this topic as much as we can, if others don't mind going in that direction.