Gimp is a slang term, adapted for use in game terms from the slang word gimp, meaning to walk with a limp or be a person with limited use of their leg/legs.
A player who's gear is far below their level, or who's gear is useless to them, is said to be gimped.
An example would be a mage with a sword that gives +22 (melee) attack power and nothing else. Another example would be a level 60 mage with the Illusionary Rod (http://thottbot.com/?i=3228) or a warrior wearing cloth armor.
Gimping used as a verb refers to the severe diminishment of a value or set of abilities. For example, a warrior who redistributes his talent point from an Arms/Fury spec to a heavy Protection spec is "gimping" his ability to dps in favor of increasing his value as a tank.
To refer to another player as a gimp is to indicate that you believe that either they or their gear is under par. This should probably be considered rude and inappropriate.
Gimping and nerfing are fairly similar in meaning, but not to be confused. A nerf originates from a game's creators/developers in an attempt to rebalance an inequality, whereas gimping, or to be gimped, is usually within the player's control.
- See also: The GIMP, an image editor