As far back as the 1840s, there were conservative Democrats (although at that time they spanned a number of different parties, including the Whigs). In the mid-20th Century , conservative Southern Democrats broke away from the mainstream Dems and, in the 1964 presidential election, managed to convince voters in five states to cast ballots for Barry Goldwater. In the 1980s, the "boll weevils" were a group of Southern Democrats who voted for tax cuts, deregulation of market forces and a strong national defense -- all conservative precepts.
After the Republican takeover of Congress in 1994, a group of moderate House Democrats blamed the defeat on what they saw as an overly liberal element that had permeated the party. They broke from the rest of the caucus and began to vote with fiscally-conservative Republicans on issues like the Contract with America, abortion, gay marriage and gun control. The group held its meetings at the Capitol Hill office of Louisiana Congressman Billy Tauzin, who had a painting of a blue dog there by Cajun artist George Rodrigue. The term "blue dog" has other purported derivations, as well. The term, "Yellow Dog Democrat," achieved popularity in 1928 during the race between Republican Herbert Hoover and Democrat Al Davis (in which a prominent Democrat crossed party lines and supported Hoover), but its later connotation was meant to refer to a Democrat who would rather vote for a dog than a Republican. The Blue Dogs of the 1990s claimed they were "Yellow Dogs" who'd been choked blue by their own party.
The Blue Dogs originally consisted of 23 members at the time of their formation in 1994, but their number swelled to 52 by 2010. Tauzin and co-founder Jimmy Hayes, also a Louisiana House Rep, eventually joined the Republican Party, but the Blue Dogs continue to have major relevance within Congress and are often sought after by both parties for legislative support.
The Blue Dogs are very much Democrats, however, and often side with their fellow party-members when enough political pressure from party leaders is brought to bear (the 2010 health care reform vote is a perfect example of this). Nevertheless, the Blue Dogs often play a major role in shaping American policy since they seem to be the only group capable of bridging the gap between two vastly different ideologies.