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What is the popularity of rugby worldwide, and why?

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Rugby is NOT the most popular sport in Australia and South Africa.  Cricket is the most popular sport in Oz, and Soccer is the most popular sport in SA.  The only countries where you could call it the most popular sport are New Zealand and several of the Pacific islands.

Rugby is popular because it is perhaps the most pure contact sport and the predecessor to many popular variations, such as American Football and Aussie Rules.  A lot of people inclined to play and watch contact sports find Rugby more appealing than other contact sports.  It is usually considered tougher, faster and more exciting than the alternatives.

The fact that it is an English sport also helps its popularity, as the English spread it to all their colonies.  It is arguably the second most popular sport in the world, behind Soccer obviously.  You would be surprised where it is popular.  South America has a long history of Rugby for instance, an Argentina has fielded a competitive team for decades.  It is also popular in Eastern Europe, the fastest growing sport in the USA and gaining traction in Asia.
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Timbo is right, but note: Rugby and Rugby League are only really popular in New South Wales and Queensland. In all the other states, it is a minor sport.

Here in Victoria, Australian Rules dominates.

The only truly national game here in Australia is Cricket.

The Super 14's has really done a lot for rugby and the rugby world cup is a very popular and successful event.
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It is the most popular sport in at least 3 nations! Australia, New Zealand and South Africa. (These are called the Tri-Nations)

It is also quite popular in the Six-Nations: England, Scotland, Wales, Ireland, France, Italy

England is the world leader, although it could lose that at any time. Many Pacific islands play it too, but their small populations make it hard for them to gain international prominence.

In Australia we have several versions of Rugby.
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