.md is markdown. README.md is used to generate the html summary you see at the bottom of projects. Github has their own flavor of Markdown.
Order of Preference: If you have two files named README and README.md, the file named README.md is preferred, and it will be used to generate github's html summary.
FWIW, Stack Overflow uses local Markdown modifications as well (also see Stack Overflow's C# Markdown Processor)