Apparently it's because people would say 'mine' before the peoples name. Names beginning with a vowel would start to get the 'N' at the end of the previos word. Dunno whether its true but apparently that is the origin of the names Ned (Ed) and Nancy (Anne) as well.
I can also add that the American rapper (male) of that name is called Cornell. Why he wanted to shorten that to a girl's name I don't know, but he did well enough with it regardless.
it's weird that this question has come up because I was only discussing it on Tuesday myself at work. I thought it was short for Maureen, I don't know why, but Maureen at work said Mo was short for Maureen, not Nelly. :S
I always believed it was Helen, as my grandmother Helen was always called Nellie. She asked my Grandfather to register my aunt when she was born and requested that her second name should be the same as hers. My grandfather had her registered as 'Joan Nellie' rather than the 'Joan Helen' my grandmother wanted. My aunt has never forgiven him!!