The effect of a gamma ray burst (GRB) in the vicinity of Earth (say 3,000 light years or so) could be disastrous, even worse than a giant meteor impact. About once every hundred million years such an explosion occurs in our galaxy.

Our ozone layer (which protects us against UV radiation) would be completely destroyed and the atmosphere would be polluted with toxic radioactive particles, produced by the intense gamma radiation.

In fact, some scientists believe these bursts have sterilized huge parts of the universe (a possible reason why we haven't found extraterrestrial life yet).

  • A popular theory is the neutron star-merger (aka "relativistic fireball") : a neutron star merges with another neutron star or a black hole. As a result, it releases the very energy-intense radiation.
  • A newer theory assumes they're produced by hypernovae (huge shortlived stars collapsing into black holes).

There's evidence the bursts occur in regions where new stars are formed and could be a part of this process of birth.
Maybe the process that created the conditions for life on Earth will also be responsible for its destruction...

  • http://scienceweek.com/swfr012.htm
  • http://www.pbs.org/wgbh/nova/gamma/milkyway2.html