Avatar is the little image that you can assign to appear beside your posts. (like my little percula clown in the fish bowl.)
As far as the etymology of the word goes... no idea!
http://www.etymonline.com/index.php?sea ... hmode=none
Based on the two links above I guess the image should in some way represent our character, I notice the common element in the definitions is the idea of embodiment or incarnation.