If you join a group of people you don't know, it's a pug. If you have a group of guildies/allies and take a random person to fill the group out, they are a pup (pick up person).
note that in PvP (specially GvG) a PUG usually stands for a guild that plays with members/guests from various other guilds.
Much like a "smurf" guild but without any actual connection to one specific guild.
in general, PUG means Pick Up Group, like lucifair already said
PUG - noun - The generally derided, often maligned, rarely cooperative, loosely coordinated beast with 8 bodies and no brains. See also rage quit; leecher; etc.
That being said, some of the best ppl I met in game were from that rare breed of pug - the organized one that gets the job done.