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A situation that is completely out of control. There was likely a plan and that plan has gone messily awry. This term has a military origin. See clusterfuck -- the "mongolian" qualifier is to indicate the extreme fuck-ed-ness of the situation. Why mongolian and not, say, armenian? Who knows...

According to the Jargon File (see Mongolian hordes technique), the term originally referred to an orgy! However, once the military began using a similar phrase to refer to situations ranging from a logistical SNAFU to a bloodbath (see clusterfuck), I can see the changeover described by sl0throp occuring.

Why "Mongolian?" If we look at the associated jargon file definition, then it probably refers to the idea of Genghis Khan's ancient Mongol hordes, and their bringing of terror and disorganization. A distant second-place guess would be some relation to the term mongoloid, which was at one point an acceptable descriptor for a person with Down's Syndrome (it has since been abandoned, because of its inaccuracy and its unfairness to people of mongoloid races).
When the Mongol hordes of Genghis Khan were advancing across Asia they used a lot of psychological tactics to gain victory. When they first attacked a village they would kill most of the men, burn a lot of the buildings, and rape most of the women. My intuition says that the term Mongolian clusterfuck comes from the fact that there were inevitably more Mongols than women, thus they would swarm around any woman found and forcibly penetrate any orifice available. If there was not a free orifice, it is said that they would use their daggers to create new ones.
The men whose lives were spared were given horses and told to ride to surrounding villages and spread the news of the invasion. This worked wonderfully, as most people in the surrounding villages quickly ran away upon hearing the news.

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