Matar el gusano
I was talking to some co-workers and they asked me a question that sounded like they were asking me to kill a worm. I could not understand what they were asking me, and they had a good laugh over it, but they would not explain what they meant. I looked up the phrase they were using: "Matar el gusano" and apparently it means to have a drink. Does anyone know why it means that? I wouldn't have guessed it meant that if you gave me weeks to contemplate it. At least now I know why they were laughing so hard. Thanks everyone! 
6 Answers
The worm
It is a common misconception that some tequilas contain a "worm" in the bottle. Only certain mezcals, usually from the state of Oaxaca, are ever sold con gusano, and that only began as a marketing gimmick in the 1940s. The worm is actually the larval form of the moth Hypopta agavis, which lives on the agave plant. Finding one in the plant during processing indicates an infestation and, correspondingly, a lower quality product. However this misconception continues, and even with all the effort and marketing to represent tequila as a premium liquor—similar to the way Cognac is viewed in relation to other brandies—there are some opportunist producers for the shooters-and-fun market who blur these boundaries.[23][24]
I think "kill the worm" would be "to finish off the bottle." However, if you google the term you will see that it also has the sexual nuances that don't belong on this site.
If you're an adult, read this: matar el gusano
From the reaction you describe in your friends, I'm afraid that they were using the more adult connotation of the expression.
If you understand that "gusano" means worm, with a little malice, and some Freudian thinking I'm sure you can arrive at a pretty good understanding of what they meant, and why they were giggling.
If not, you can look it up in Google (safe search off). Eventually I'm sure it'll hit you.
A number of years ago, I was told by a good friend from Jalisco about the worm. According to him, some distillers add worms to their products as a test of the alcohol content. The less alcohol, the more time it takes to kill that worm. It has time to curl. If it dies quickly, meaning a LOT of alcohol, it dies straight and does not have time to take a curl. Now granted, this may be something of an urban legend, but it sure does make for fun conversation among your gringo friends. You'll appear to be "in the know."
Nowadays, tequila does not contain a worm, but I remember the days when any good bottle of tequila had a worm from the agave plant, the plant used to make tequila. But those were the days when agaves grew wild in Jalisco and demand for tequila was nowhere NEAR the demand today. If the producers looked for a worm for each bottle, the agave worm would be extinct. So, to "kill the worm" como matar el gusano, definately means to drink the entire bottle down. It's considered a real demonstration of machismo to be able to do that. But because of the sexual conotations as well, you can believe that your friends were definately making dirty double entendres. ....at your expense. jajajaja. Estoy riendo mientras lo escribo mi comentario. jajaja
And for those that do NOT know this, Jalisco is the only place in the world that can grow the Agave cactus to a level of maturity and in numbers large enough for the world's demand for Tequila. The last time I was there, I even saw many farmers in Aguascalientes and Michoacan trying to grow agaves but their crops definately looked stunted. During the 90s, world demand for good tequila grew at such a phenominal rate that the virtually the entire state of Jalisco had to, once and for all, change over the growing agave as a plantation cash crop instead of simply going out in the desert and looking for enough to make another bottle. On the road between Moralia and Guadalajara, the countryside is nothing but agave fields. It's farm country that would make any Nebraska corn farmer proud.
I've heard "matal el gusanillo" used to mean "to have a hair of the dog (that bit you)"
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What qfreed said is very true. I had a bottle of Gusano Rojo mezcal sitting on my bar for years. Another phrase you hear is "besar el gusano", to kiss the worm. You tip the mezcal bottle to your lips upside down and take a deep enough drink that the worm sinks to the spout of the bottle and touches your lips.
I don't recommend this. There is absolutely nothing like a mezcal hangover.
