The term was supposedly coined by Samuel Taylor Coleridge (of Rime of the Ancient Mariner fame) in a deliberate attempt to be ironic.
The word, of course, is so huge that it is impossible to ignore, yet it refers to things that are so small most people mistakenly find them insignificant. Yet another example of the Art world using language to poke fun at us commoners.
On a side note, one of my professors at UAB used an even longer incarnation of this word (antifloccinaucinihilipilificationistical) in the title of his paper about Samuel Beckett's 30-second play Breath. (For more info about that subject, see Breath.)
On yet another side note, there seems to be some slight disagreement on the spelling of this word. Several online dictionaries spell it the way it is spelled above, but others spell it with an extra 'c', as in floccinauccinihilipilification. It is unclear whether this is just a common misspelling, or if there are actually two schools of thought on how to spell it, or if a conspiracy is involved, or what. But a quick search on Google revealed just as many hits for floccinaucinihilipilification as there were for floccinauccinihilipilification, and so it remains a mystery why so many people would misspell the word in exactly the same way.
Oh, and of course, 31337 h@X0Rz spell it "phl0x$33/V0x3/V1h31uPh1K@7$hu/V," but that's beside the point.
Update: Gritchka tells me that the extra 'c' in "naucci-" is just an error from looking at the previous "flocci-," but there is indeed a correct alternative spelling to the word, using pauci- instead of nauci- (i.e. floccipaucinihilipilification). Wikipedia says nauci- is the original form and Sir Walter Scott coined the pauci- form, fyi.