Its origins are murky, but probably from Old Norse:
mid-14c., nygart, of uncertain origin. The suffix suggests French origin (cf. -ard), but the root word is probably related to O.N. hnøggr "stingy," from P.Gmc. *khnauwjaz (cf. Swed. njugg "close, careful," Ger. genau "precise, exact"), and to O.E. hneaw "stingy, niggardly," which did not survive in Middle English.
As a theater critic, I regularly see old plays where "niggardly" is spoken innocently enough—but its first two syllables always snag my ear like a fishhook. As Christopher Hitchens wrote in his 2006 article "The Pernicious Effect of Banning Words":
It was while giving a speech in Washington, to a very international audience, about the British theft of the Elgin marbles from the Parthenon. I described the attitude of the current British authorities as "niggardly." Nobody said anything, but I privately resolved—having felt the word hanging in the air a bit—to say "parsimonious" from then on. That's up to me, though... Hatred will always find a way, and will certainly always be able to outpace linguistic correctness.
In 1999, an aide to D.C. mayor Anthony Williams had to resign for using "niggardly" in a conversation about the city budget, which seems absurd. Using "niggardly" these days might be ill-advised—it's technically innocent, but it does snag the ear and distracts from clear communication, which is the whole point of careful word choice—but it shouldn't be a firing offense.