Good question! Here's what WikiAnswers says:
All but one team (Toronto) in the MLB is based the US. So why do we call the championship event the World Series?
Some have speculated the name derived from the New York newspaper, The World, which reported the game results. But this myth was debunked by the Baseball Hall of Fame in 1999. Barney Dreyfuss, owner of the Pittsburgh Pirates, deserves credit for coining the term. In 1903, he challenged the Red Sox (then known as the Boston Americans) to a "World's Championship Series." It has been held every year since except twice (in 1904 and 1994).
Although the league is US-based, players are scouted from around the world. Countries such as Mexico, the Dominican Republic, Venezuela, Japan, Taiwan, and Cuba are all represented in the MLB. In fact, in the 2006 season, players born outside the US represented 27.4 percent of the MLB.
Considering that the MLB is the world's premier league for baseball and many players are recruited from outside the US, calling the championship series the World Series is not too far-fetched.