Some FAQs from the D&D newsgroup:

G8: Who's this "Monty Haul" character I keep hearing about?

Monty Hall was the host of the 60's & 70's, and 90's American game show Let's Make a Deal. People would dress up in silly costumes, then get chosen out of the crowd to play the game. Monty would give the lucky contestant a handful of money, then talk them into trading the money for whatever was behind door number one, door number two, door number three, or what was in the box, or they could just keep the money. Each time they traded, he would give them another choice. After they decided to stick with a choice, Monty revealed what had been won. Prizes could be anything, good or bad, such as money, cars, jewelry, a years supply of auto wax, goats, inner tubes, exotic vacations, a pound of confetti, etc. Gary Gygax named the style of play where game masters hid treasures behind some doors, monsters behind others and then let the players choose their fate "Monty Haul" gaming, making a pun on the game show host's name.
The term has come to be used to refer to sessions where game masters encourage munchkin players; basically any game can be considered a Monty Haul game where the game master sets up unfathomable amounts of treasure and earth-shattering magic items guarded by weak and wimpy monsters, thus giving enormous amounts of power to beginning-level characters.

G9: What is "munchkinism?" What does the Wizard of Oz have to do with *D&D?

Munchkinism is often confused with Monty Haul gaming in that both involve incredibly high power levels with a minimum of risk involved. However, where Monty Haul is usually the fault of the GM, munchkinism is usually the demesne of players, although one can encourage the other. Munchkin players often view the game as a contest which can be won, and done with a minimum of struggle and uncertainty. The player is winning when he defeats everything the DM throws at the character, and does it without breaking a sweat. Thus, having a character who can deal out large amounts of damage every round is more pleasurable, as it gives the player a better chance of "winning." Some DM's foster this "them vs. me" type of atmosphere (especially Monty Haul DM's), but it is usually not the DM's fault. Well, it somewhat is, as the DM has to allow the character in the first place, but it is the player who has the real problem here.
Munchkin characters are created by "min/maxing," or rather, "rules rape," wherein the player finds any and all advantages the rules (and especially any loopholes contained therein) allow the character, with few, if any drawbacks. They are also outfitted with the equivalent magic items of an entire party of many, many more levels of experience. Such characters tend to be ultra-powerful, and can destroy whole armies in one round. Any such character choices are made solely from a power-level standpoint, and not from a role-playing point of view.

This is not to say that all "power gaming" is munchkin and bad, as it is possible and common for a group to decide to run a campaign with incredibly high amounts of power, yet have it contain just as much challenge and roleplaying as any other campaign. The enemies are usually as well equipped as the players, and are played extremely intelligently, to boot. With this kind of game, there is actually some question as to whether or not any or all of the characters could survive a given encounter, but the point is not basic survival, but a balance of power and role-playing. Characters also tend to have character flaws of some sort which balance out the power level in some meaningful role-playing-based way. In addition, most of the characters in a "power game" environment actually have to work (and role-play) for each and every powerful item they gain, instead of turning into a walking magic shop when "my two rich uncles just willed all of their magic items to me," or some such. A stress is put on role-playing, so that the game isn't just all "power" and no "game." However, it is easy to fall into the trap of treating such a game like an arcade game--blast all the baddies into oblivion and you win! It is at that point, when the power, and not role-playing, is all that matters that a power game becomes munchikinish. Munchkin characters usually come to light when a player wishes to bring in a favorite character who was "allowed" in a previous GM's campaign, one with the maximum ability scores, proficiencies, abilities, and enough magic and special items to take out both Death Stars simultaneously from across the galaxy.

No one seems to know exactly how such characters have come to be identified with the tiny folk from L. Frank Baum's books, but it probably has something to do with the sheer annoyance factor such characters exude. Another theory is that, since it seems that most munchkin players are the younger set of players, say pre-teens and down, that someone's term for people younger than themselves morphed into a term for the type of players described above, and has since changed meaning to also include the characters created by such players.

I've never heard the term Munchkin in reference to regular PNP RPGs, but it could have something to do with the card game of the same name:

http://www.sjgames.com/munchkin/game/

(although it could be the card game was named after the D&D syndrome, rather than vice versa)

Yeah, munchkin is an *old* term, but that game is definitely riffing on the same phenomenon. looks like a fun game, actually. ;-)

Yeah, I've been mulling over picking it up to see how it works out. From what I've heard it's basically all about backstabbing your friends, which is always good ;).