public class CFS_ContractEditItemsController {

    private final Contract parent;
    public Contract_Item__c[] detail { get; set; }

    public Contract_Item__c newItem {get; set;}

public string getProductGroupsJson() {
        Product_Group__c[] groups = [select  Product_Line__c,Name, Product_Category__c from Product_Group__c];

        return Json.serialize(groups);

    }
}

<apex:page standardController="Contract" extensions="CFS_ContractEditItemsController" id="page">
    <apex:includeScript value="//code.jquery.com/jquery-1.11.2.min.js"/>

    <apex:stylesheet value="/sCSS/25.0/sprites/1342034628000/Theme3/default/gc/versioning.css"/>
    <apex:stylesheet value="/sCSS/25.0/sprites/1342034628000/Theme3/default/gc/extended.css"/>
    <apex:includeScript value="/soap/ajax/20.0/connection.js"/>

<style>

(function($) {

function setupTable() {
    $('.Product_Line__c tr.datarow').each(function() {
        var tr = $(this);

        var cat = $(this).find('.Product_Line__c').val()
        tr.find('select.Product_Line__c').change(function() {
            // dependent product options
            populateProductPicklist(tr, getProductOptions($(this).val()));
        });
        tr.find('input, select, textarea').change(function() {
            saveRowData(tr, $(this));
        });
        populateCategoryPicklist(tr);
        // load the initial product options
        populateProductPicklist($(this), getProductOptions(cat))
    });

}
function getProductOptions(cat) {
    return productList
            .filter(function(prod) { return prod.Product_Line__c == cat })
           .map(function(v) {
                return "<option>" + (v.Product_Category__c)+ "</option>";

})
}


<apex:form title="Edit Contract Items" id="form">
    <apex:sectionHeader title="Contract Items"/>
    <apex:pageMessages id="messages"></apex:pageMessages>
    <apex:pageblock >
<form id="frmAddRow">
                <apex:pageBlockSection title="Product Details" collapsible="false" columns="1">
                    <apex:inputField value="{!newItem.Product_Line__c}" styleClass="Product_Line__c" required="true"/>

                   <apex:pageBlockSectionItem dataStyleClass="requiredInput">
                        <apex:outputLabel value="Product Category"></apex:outputLabel>

                       <apex:selectList value="{!newItem.Product_Category__c}" styleClass="Product_Category__c" required="true"/>
                    </apex:pageBlockSectionItem>
/apex:pageblock>
</apex:form>
</apex:page>