Furfy is a wonderful piece of Australian slang. Like all slang words, it has a number of localised spellings and meanings; the use and interpretation of it is purely up to the participants in the conversation.

A furfy is a lie, a half-truth, a red herring. It is something that is not quite true, but believable at the same time. Usually said in good humour, a furfy is rarely seen as malicious, and should be delivered and taken at the level of a practical joke. If there is any malice behind the story, it turns in to something else entirely, like misdirection, a ruse, or a con.

A furfy can also mean a mistake, usually unintentional, or minorly negligent. Borrowing someone's car without telling them isn't a furfy, forgetting to fill it up or park it in the same spot is. Failing to tell someone they've got food on their face isn't a furfy, telling them to wipe the wrong side is. Not realising there is a node missing isn't, noding it in good humour once realised is.

A furfy has the same sort of meaning and impact as scuttlebutt, but with more benign roots. As such, Sydneysiders especially think that a furfy is a rumour, a story told that is meant to cause curiosity and by extension of that, spread itself like a meme.1

Origins
Furfy (also apparently spelt furphy, although never seen in this form by this noder) has origins in war.2 A certain John Furphy ran a water carting business and was employed by the Australian Army to cart water for the troops. These water carts had a number of religious messages pertaining to the evils of alcohol and encouraged the diggers to drink water. As a result, these water carts became a hotbed for a good old chin wag or gossip, and the swapping of tall tales. As a result the tales themselves, usually embellished beyond believability, became known as a bunch of furfies/furphies/furphys.

Other tidbits

  • Furfy is first referenced on Usenet on June 11, 1992, in talk.abortion.3 It is used in this context as more of "a useless discussion" rather than anything good humoured. It is followed up by a question "What the heck is a furfy?". Furthermore, it takes another two YEARS for it to be used next, on August 2, 1994, in reference to the moaning that lower-ranked Carlton Magpies AFL players would be unable to play anywhere else. This is a furfy, as the use of a cover story is a valid use of the term.
  • Furfy is, in a truly hilarious use of the term, a "a new free tool that links potential tenants with landlords and potential buyers with sellers." Maybe they should have looked up the word first.4

References
  1. Divided by a common language -- Wacogne 88. http://adc.bmjjournals.com/cgi/content/full/88/1/37
  2. Furphy - Aussie words - Australian National University. http://www.anu.edu.au/andc/ozwords/November_97/6._furphy.htm
  3. Google Groups. http://groups.google.com/groups/search?q=furfy&start=290&sa=N&scoring=d&filter=0&
  4. Furfy.com. http://www.furfy.com