The term appears to have been first used by the alchemist Paracelsus. He once claimed that he had created a false human being that he referred to as the homunculus. The creature was to have stood no more than 12 inches tall, and does the work usually associated with a golem. However, after a short time, the homunculus would turn on its creator and run away. The recipe consisted of a bag of bones, sperm, skin fragments and hair from any animal you wanted it to be a hybrid of. This was to be laid in the ground surrounded by horse manure for forty days, at which point the embryo would form.
The term was later used in the discussion of conception and birth. In 1694, Nicolaas Hartsoeker discovered "animalcules" in the sperm of humans and other animals. Some claimed that the sperm was in fact a "little man" (homunculus) that was placed inside a woman for growth into a child; these later became known as the spermists. This is not as silly as it sounds today, and neatly explained many of the mysteries of conception (for instance, why it takes two). However it was later pointed out that if the sperm was a homunculus, identical in all but size to an adult, then the homunculus must have sperm of its own. This led to a reductio ad absurdum, with a chain of homunculii "all the way down".
Today the term is used in a number of ways to describe systems that are thought of as being run by a "little man" inside. For instance, the homunculus continues to be considered as one of the major theories on the origin of consciousness, that there is a part (or process) in the brain who's purpose is to be "you". The homunculus is often invoked in cybernetics as well, for similar reasons.
The homunculus is also commonly used to describe the distorted human figure drawn to reflect the relative sensory space our body parts represent on the cerebral cortex. The lips, hands, feet and sex organs are considerably more sensitive than other parts of the body, so the homunculus has grossly large lips, hands and genitals.