means A frightening or distressing dream that wakes you with your heart pounding, or by extension any situation that feels as awful as one.

from From Old English 'night' plus 'mare' — and the 'mare' here has nothing to do with horses. The Old English 'mære' was a demon, an evil spirit believed to sit on the chest of sleepers and crush them with suffocating dread. So a nightmare was literally a night-fiend pressing down on you in the dark. The word is related to similar goblins across the Germanic languages, and the same root lurks in the French 'cauchemar.' The dream sense — a bad dream rather than the creature causing it — came later, once we stopped blaming demons for our restless sleep.