Bloody Mary was Mary Tudor, Queen of England, and daughter of King Henry the 8th and Catherine of Aragon. All her life, she was a mean brat to her little sister, Elizabeth and her brother Edward VI. She did not like them at all and was very jealous. When Edward VI died, she became Queen Mary of England. She was hated all over for changing the religion in England from Protestant to Roman Catholic. She mass-murdered over 100 Protestant leaders, earning her name as "Bloody Mary".

This is another version...

Lived deep in the forest in a tiny cottage and sold herbal remedies for a living. Folks living in the town nearby called her Bloody Mary, and said she was a witch. None dared cross the old crone for fear that their cows would go dry, their food-stores rot away before winter, their children take sick of fever, or any number of terrible things that an angry witch could do to her neighbors.

As the legend goes you have to be in a dark room in front of a mirror with a lit candle, then you say Bloody Mary three times.  Then it is said that you will see her reflection in the mirror, and of course as all good urban legends go you will die or at the very least be scared witless.