FOB is used by people of Middle-Eastern descent, and Southeast Asian. I am Pakistani-American, and I have heard of this term as being used with fellow desis; it is basically the opposite of an ABCD.
A prototypical desi FOB would be someone who moved to America after completing high school in a desi country. Stereotypically, they smell rather different than your average American. I'm not so sure why this is, most probably because of the differences in diet. They most certainly will have a thick Apu-like accent, this is crucial to achieve maximum FOBiness. General social ineptness is a large part of it too. So, a desi FOB is someone who is new to America, has a distinct odor, a matching accent, and will display signs of social ineptness.
Acceptable uses of the word are much like any other racial slang, allowed only by those that are "in." A desi may refer to another desi as FOBy in jest, to their face. If someone is truly FOBy, it wouldn't be nice to say it to their face, it's more palatable to quietly point it out to your friends. In my experience, it is generally frowned upon for someone who's not Middle-Eastern to call someone a FOB. It is a word used mostly by second-generation immigrants, whos parents were the first to move to America. I don't find it to be as common among people over 25 to use the term.