The Nephalem were the first humans upon Sanctuary, created as a result of the union between Angels and Demons. The creation process is unknown, although it is for certain completely unlike human procreation.
Such a Celestial union granted the Nephalem great power. So great was their potential that the demon Lilith attempted to use their power to build an army. Inarius put an end to her malicious designs and used the Worldstone to diminish the power of the Nephalem. Such is the curse upon the Nephalem that each successive generation also loses power. In fact, only the first generation who have kept their full potential.
The lives of very few individual Nephalem have been recounted throughout the history of Sanctuary, and it is only those few who are now known by name.
The Nephalem comes from the biblical mythology of the Nephilim.