It means, for example, if your approached by violence fight back with violence... basically eye for an eye, etc.

A Step from the New World to the Old, and Back Again: With Thoughts on the Good and Evil in Both - by Henry Philip Tappan - 1852 ... so I lighted one to make an atmosphere for myself : as the trappers on the prairies fight fire with fire... This seems to be a great beginning for the quote but one still cannot be sure. It's a good question and I'm still scouring the web for more

It could come from the forest fighting arena, where to contain a forest or prairie grass fire, you create a 'fire break' by a controlled burn of the area in the fire's path. When the out-of-control fire reaches the fire break, there is no longer any combustible fuel and the fire 'burns itself out.'

In order to extinguish huge prairie and forest fires in the early West, desperate American settlers would sometimes set fire to a strip of land in the path of the advancing fire and then extinguish it, leaving a barren strip with nothing for the approaching fire to feed on. Although effective, this tactic was (and is) extremely dangerous, as the backfire itself can get out of control.

The age-old oxymoron, American Military Intelligence.

The ORIGIN probably has to do with setting "fire breaks" to stop large fires.

Sometimes, when fighting a forest fire, it's a good move to start a controlled fire yourself in order to create a strip of burnt ground to act as a firebreak. Thus to "fight fire with fire" is to counter a threat by responding in kind. For example, if someone starts a nasty rumour about you, you could "fight fire with fire" by starting a counter-rumour about them. A 'fire break' is a good example of literally fighting fire with fire, but metaphorically speaking it is often used quite emphatically so that the 'fire' is both the similarity of retaliation and the willpower/passion behind it. http://www.phrases.org.uk/bulletin_board/43/messages/932.html An injunction to counter like with like. Cf. early 14th-cent. Fr. lung feu doit estaindre lautre, one fire must put out another; [1608 Shakespeare Coriolanus iv. vii. 54] One fire drives out one fire; one nail, one nail. If ‘Fire will fight fire’, ‘Indian’ ought to be a match for ‘Injin’ any day. [1846 J. F. Cooper Redskins III. i.] I write to ask what your intentions are. ‥Do you intend to fight fire with fire? [1869 P. T. Barnum Struggles & Triumphs xl.] ‘You think the other Palestinians have hired some heavies as well?’ ‘Why not? Fight fire with fire.’ [1980 C. Smith Cut-out ix.] Related to: similarity and dissimilarity; ways and means Combat an evil or negative circumstances by reacting in kind. For example, When the opposition began a smear campaign, we decided to fight fire with fire. Although ancient writers from Plato to Erasmus cautioned that one should not add fire to fire, this warning is not incorporated in the idiom, which was first recorded in Shakespeare's Coriolanus. http://www.answers.com/fight%20fire%20with%20fire