Nerf is a UO term describing when an item, skill, quest, or really anything in the game is diminished in power and/or usefulness. Some nerfs are called for and appreciated by players, while others are not.
Example: "Thieves really got nerfed when Trammel came out."
The term comes from a line of toys (mostly weapons) by the manufacturer Hasbro. These are made from a soft foam that is difficult to harm yourself (or others) with.