An acronym (Greek ακρον, akron, "tip" + ονυμα, onyma, "name") is an abbreviation formed from the initial letters of words. Depending on how many of the constituent words begin with vowels and the phonotactics of the language an acronym exists in, acronyms can be pronounced as a word, as a series of the names of the letters, or some combination of the two. Sometimes acronyms have idiosyncratic pronunciations, like NAACP, which is pronounced "N double A C P".
Acronyms often occur in jargon or as names of organizations because they often serve as abbreviations of long terms that are frequently referenced, so a shortened form is desirable. Cynics have quipped that acronyms are used to obfuscate.
Traditionally, abbreviations use a period to mark the part that was deleted. In the case of acronyms, each letter is its own abbreviation, and gets its own period. However, this usage is becoming less common as the presence of all capital letters is sufficient to indicate the word is an abbreviation; however, some influential usage guides insist on the many-periods treatment, such as the one used by the New York Times. Some acronyms undergo assimilation into ordinary words: often they are written in lower case, and eventually it is widely forgotten that the word was derived from the initials of others: scuba and snafu, for instance. The term anacronym has been coined as a combination of the words "anachronism" and "acronym" to describe acronyms whose original meaning is forgotten.
There is debate over whether the word acronym can be applied to any set of initials. Some people insist an acronym is only a set of initials which is pronounceable as a word. Some dictionary definitions can be interpreted to support this view. Under this view, sets of initials like "BBC" and "IBM" are initialisms and not acronyms. On the other hand, under the restrictive definition of 'acronym' there is no English word to describe all strings of initials that are used in place of the full words. For many people, the word acronym is used for all such sets of initials regardless of whether they are pronunced as a word or as the names of the letters in sequence.
Sometimes non-initial letters, and the initials of short function words (such as "and", "or", "of", or "to") are included in the acronym to make it pronounceable, in contradiction to the normal rule for abbreviation. Additionally, abbreviations like "Interpol" and "Gestapo" that consist mostly of non-initial letters of constituent words are often called acronyms, although some people insist they are properly called portmanteaus.
Source: Fowler
See also: pseudo-acronym, backronym