How was the earth divided? (Gen. 10:25) Gen. 10:25
And unto Eber were born two sons: the name of one was Peleg; for in his days was the earth divided; and his brother's name was Joktan.

Through some simple math, we know that Peleg was born 101 years after the flood.
I had assumed that this verse meant a demographic division, but I don't think there could be that many people on the earth yet (assuming only 8 survived the flood). I got this idea from v. 32:

These are the families of the sons of Noah, after their generations, in their nations: and by these were the nations divided in the earth after the flood.

I understand that the name Peleg has some relation to division, but I'm not too well-versed on the original Hebrew meaning.
Does this verse signify a physical division (like breakup of Pangaea), or something more like a demographic division?
The explanation that I'm familiar with would indicate that this is referring to the division of cultures and tongues at the time of the Tower of Babel.

I can't take credit for the answer on my own.  The explanation that makes the most sense to me is the one found here: http://www.answersingenesis.org/articles/cm/v22/n1/peleg


  Four generations after Noah, Genesis 10:25 records the birth of Peleg
  (meaning division) ‘for in his days was the earth divided’. Some
  suggest the continents of the earth were divided at this time.
  However, this seems unlikely, as such a process would have had to
  occur within a very confined time period. The resultant geological
  violence would be overwhelmingly catastrophic—like another Noahic
  Flood all over again. Any continental separation thus likely occurred
  during the Flood. 1
  
  The traditional interpretation, which seems more reasonable, relates
  this verse to the division of people/nations at the Tower of Babel
  event in Genesis 11. (Just like the English ‘earth’ can have a variety
  of meanings, the Hebrew erets can also mean nation(s)—thus erets
  Yisrael, the land (nation, people) of Israel.) According to the
  biblical chronology as deduced by Archbishop Ussher, the Flood
  occurred in 2349–2348 BC, and Peleg was born in 2247 BC about a
  hundred years later. Do ancient writers shed any light on when this
  happened? The answer is a resounding yes.


(Much more follows - visit the link for the full article).