In Made In America, Bill Bryson points out that the first cash register, Ritty's Incorruptible Cashier, patented 1883, rang a bell every time the cash drawer was opened. Bryson claims that store owners changed prices to end in an odd number, forcing the cashier to open the register every time. It was only later, he says, that store owners noticed "the odd psychological effect" (his words) that made 99 cents seem markedly cheaper than $1.00
Unfortunately, Bryson offers no source for this idea.
I know of no competing theories as to why or how business owners first started pricing using odd numbers.
Interestingly, the Wikipedia page for the history of the cash register repeats Bryson's theory, citing… Bryson.
http://books.google.com/books/about/Made_In_America.html?id=XMKkEh9JHncC
As for how did it become so universal, see these askscience threads: