As far as I can tell, this is a result of the Christianization of the ancient Celtic autumn festival of Samhain. Samhain marked the end of the harvest and was a time of gathering and remembering those who had passed from this life to the next. The veil between the world of the living and the world of the dead is believed to be thinnest on this night when summer and fall merge (a new beginning and an end to the old).
What does all of this have to do with witches? Well, you must remember that anyone who practiced the 'old ways', in the eyes of the Church was considered a witch. And according to Christian belief, witches had a pact with the devil, and were the very embodiment of evil itself. Those who continued to gather around the traditional Samhain fires after Christianity began their own holiday of "All Hallows Eve" (a holiday to remember the dead, conversely enough), were branded witches and in league with the Devil. Thus the beginning of the 'wicked witch' theme still so popular in the Halloween culture of today.