The term fag derives from the word "flag", which is a variant of the Middle English word flacken (to flutter), or as a shortened form of the word faggot, which originally meant a bundle of sticks and is now a perjoritive term for a homosexual person.
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Faggot or fag, in modern American English, Canadian English and Australian English usage, is a generally pejorative term for a gay or effeminate man. Its use has spread to varying extents elsewhere in the English-speaking world.
Originally confined to the United States, "fag" and "faggot" in their homosexual senses have been spread by American popular culture to other English-speaking countries, where it has partly displaced terms such as "queer" or the British "poof" as colloquial or abusive terms for gay men, particularly among heterosexual youth.
However, the continuing use of "fag" in British slang to mean cigarette and "faggot" to mean a bundle of sticks (or a fool) has severely limited adoption of the American use of the terms in the British Isles.