Now that I have one....

How it became used as pictoral representations of people on the 'Net I have no idea, but here's your answer:

Main Entry: av·a·tar
Pronunciation: 'a-v&-"tär
Function: noun
Etymology: Sanskrit avatAra descent, from avatarati he descends, from ava- away + tarati he crosses over -- more at UKASE, THROUGH
Date: 1784
1 : the incarnation of a Hindu deity (as Vishnu)
2 a : an incarnation in human form b : an embodiment (as of a concept or philosophy) often in a person
3 : a variant phase or version of a continuing basic entity
 
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