[from J.K. Rowling's Harry Potter books, 1998] A non-wizard. Not as disparaging as luser; implies vague pity rather than contempt. In the universe of Rowling's enormously (and deservedly) popular children's series, muggles and wizards inhabit the same modern world, but each group is ignorant of the commonplaces of the others' existence — most muggles are unaware that wizards exist, and wizards (used to magical ways of doing everything) are perplexed and fascinated by muggle artifacts.
In retrospect it seems completely inevitable that hackers would adopt this metaphor, and in hacker usage it readily forms compounds such as muggle-friendly. Compare luser, mundane, chainik, newbie.