Perhaps this has been posted elsewhere, but if you're really interested, seek out John Coski, "The Confederate Battle Flag," (Harvard University Press, 2006). As far as I'm aware it's the most cogent treatment of the issue out there.

The very short version is that the flag (or rather, flags - there are several designs. The one you're probably referring to is generally known as the Confederate battle flag) was rarely seen in the immediate post-Civil War years, except perhaps at veterans reunions and the like. It reappeared gradually and was in some cases an ambiguous symbol for both whiteness and regional identity, especially in the period between the outbreak of WW2 and the Brown v Board of Education decision. It resumed its present popularity (or notoriety) in large part as a response to civil rights agitation. Most uses of it in state flags, public displays, etc., date to that period. Then again, Mississippi only officially added it to their state flag in 2001.

see also: Christopher C. Nehls, "Flag-Waving Wahoos: Confederate Symbols at the University of Virginia, 1941-1951," The Virginia Magazine of History and Biography 110:4 (2002)

I didn't get a huge response and with the number of upvotes, I am going to assume that there are some others interested. They say that the best way to get the right answer is to post the wrong one.

Here is what I know, the "rebel" flag is actually the battle flag of the Army Of Northern Virginia and the Army of Tennessee and some others and was used as a Naval Jack by the Confederate Navy. The battle flag was never adopted by the Confederate Congress, never flew over any state capitols during the Confederacy, and was never officially used by Confederate veterans' groups.

After the Civil War, it fell into obscurity until WW2 when is was adopted by some Southern military units and a couple of ships. It was adopted by the "Dixiecrats", who ran primarily on a segregationist platform, in 1948 and resurgent KKK as a response to the burgeoning Civil Rights movement. The Dukes of Hazard helped popularize it as well.

These days it seems to have been adopted by people with an adolescent mindset as a symbol of rebellion against, racist groups and people who have a poor grasp on history and see it as some sort of heritage from a heroic lost cause of a war. Maybe this bit is more sociology than history though and is my opinion.

Hopefully this post will generate some responses with more knowledgeable people weighing in.