Before the expansion of WoW (World of Warcraft) there was a 40 man raid instance titled Molten Core. Within Molten Core there was a mass amount of lava everywhere. In 2005 a guild leader named Ladyamazon of Reckless Endangerment of the Azjol-Nerub server would frequently tell her guild members to "Die in a Fire". This would most often come after they screwed up or made her mad. Basically it was telling them to go kill themselves since they were obviously bad at playing.
Since then many have used it on the WoW forums. Also players carried it with them to other internet areas. Since then it has spread like wild fire on the internet.
Die in a fire is basically a "go kill yourself" but in a funner way. Use it to insult or to tell some one to F' off.
Lady: Go DIE IN A FIRE!
GUY: That cashier just ripped me off
GUY2: Dude she needs to die in a fire.