On 29th August, 1882, the last day of a Test match between Australia and England was in progress at the Oval cricket ground. It was a low-scoring match. Australia made 63 in the first innings. England made 101 and then bowled Australia out for 122, leaving them to make 85 runs to win the match.

A great bowling effort (7 for 44) from the Australian fast bowler Fred Spofforth, including a spell of 4 wickets for 2 runs, helped the Australians bowl the English team out for 77, just seven runs short of victory.

The British press widely reported this stunning loss. One of the most famous reports was a mock obituary by Reginald Brooks in The Sporting Times, as follows:

In Affectionate Remembrance of ENGLISH
CRICKET, which died at the Oval on
29th AUGUST, 1882, Deeply lamented by
a large circle of sorrowing friends
and acquaintances

R.I.P.

N.B.—The body will be cremated and the
ashes taken to Australia.

The term "the ashes" was then used from time to time by the English and Australian captains and after a few years caught on as the definitive term for England-Australia Test series.

See more at http://en.wikipedia.org/wiki/The_Ashes#Legend_of_The_Ashes