Wug is a portmanteau of 'worm' and 'bug'. It is used primarily in linguistics and ethnobiology, as it provides a direct English translation for a common word in many languages. In fact, in the development of languages, a word equivalent to wug seems to be one for the first words coined to refer to animals (the order appears to be something like bird, fish, snake, wug, mammal). Wug generally includes within its scope all insects, worms, spiders, millipedes, and the like, and may also include small reptiles and amphibians.
While many modern languages have a word equivalent to wug -- for example, the Chinese chong (虫 or 蟲) and the Portuguese bicho -- the closest English comes is creepy-crawlies, or, depending on dialect, 'bug' itself.
Wug was coined in a paper by Cicil Brown: Brown, Cecil. H. 1979. "Folk Zoological Life-Forms: Their Universality and Growth", American Anthropologist 81.4:791–812.