The literally ugly 'ugly American'
The earliest instances of "ugly American" that appear in connection with the novel by Lederer and Burdick recognize that the term refers to the physical appearance of the engineer Homer Atkins. For example, Carol Harding, "Book Reviews from the P.V. Library," in the Palos Verdes [California] Peninsula News (December 11, 1958) offers this brief summary of the novel:
Two master storytellers have written a bitter and highly readable book of topical importance. This novel is about men and women in Southeast Asia—people making mistakes, people trapped by the beauty of a land or of a woman. It is particularly concerned with an ugly engineer who works productive miracles with lengths of bamboo and an old bicycle.
And Charldean Newell, “Engineer Doubles as U.S. Diplomat,” in the [Denton, Texas] Campus Chat (March 6, 1959) has this:
Lederer and Burdick have written a book about a fictional American engineer, but that engineer is typical of a small group of Americans who understand foreign peoples and who serve as good will ambassadors for the U.S. in other nations.
Atkins, called "ugly" because of his battered appearance, and his wife Emma fly to Sarkhan. They move into a small cottage in a suburb of Haidho.
The ugly American knows he cannot convince the people of the wrongness of their method [of irrigation] until he has proof of a substitute.
Both of these reviewers understand that the novel uses the phrase "ugly American" as a literal description. In this regard, the usage is indistinguishable from the one that appears in Thomas Rourke, Stallion from the North (1932) [combined snippets]:
...turned him down. The American got her for nothing—an ugly American at that."
"That's he! That's the ugly American," they all shouted, laughing at me.
The cossack rocked with laughter.
"Well, well, well. But you aren't a beauty, you know."
The figuratively ugly ‘ugly American’
From Roscoe Drummond, "The 'Ugly Congressman'" in the Stanford [California] Daily (March 30, 1959):
By now members of Congress must have a pretty good idea how distressed foreign service officers are to see so many taking the novel, "The Ugly American," as the typical U. S. diplomat.
For weeks the newspapers have been reporting the news of how Congressmen are packing their payrolls with relatives, paying some children attending college high salaries for work way beyond their experience; how some use government money to pay henchmen back home to do political chores; how another Congressman paid himself rent for the use of his front porch as an alleged "office," and all the while trying to cover it up with that curtain of "classified" secrecy which they criticize so virtuously when the executive branch of the government does the same thing.
It is well to have all this in the open. It is the only way it will be cor[r]ected. But just as the "Ugly American" is a portrait of the exception among Americans serving abroad, so the "ugly Congressman"—who hires his relatives in order to keep his office-pay allowances in the family and who is so proud of it that he wants to keep it secret—is the exception among honest and honorable members of Congress.
This piece appeared as a fill-in column for Walter Lippmann, a very influential syndicated columnist who had won a special Pulitzer Prize for journalism the year before but who was vacationing in Europe and therefore unavailable to submit his usual columns. Drummond evidently interprets "ugly American" as meaning "incompetent or corrupt American diplomat"—which runs counter to the sense of the term in the novel—and he emphasizes that these features are the exception rather than the rule among members of the U.S. foreign service, just as (according to Drummond) "ugly Congressmen" are less common than honest and honorable ones.
From Vic Emmanuel, "'Splendid American' Not 'Ugly' in Laos," in the [Houston, Texas] Rice Thresher (October 2, 1959):
Last Sunday night at 10:30 o’clock ABC carried an excellent documentary titled "The Splendid American," narrated by John Daly. This program was a reaction to the best selling novel by Lederer and Burdick, The Ugly American.
The prime example of "The Splendid American" was Dr. Thomas Dooley, who has set up several hospitals and clinics in L[ao]s. His main goal in setting up a clinic is to make it self-sufficient in terms of personnel.
Most Americans in Laos work for a very small salary in some cases $60 per month, and use few U.S. dollars in performing their job. This is the American, ugly or splendid.
Obviously the documentary project viewed splendid as the opposite of ugly as a description of U.S. foreign aid workers overseas—and that is certainly how the author of this article interpreted it.
From Drew Pearson "Filipinos' Literacy Rate Is Termed High" in the Madera [California] Tribune (December 28, 1959):
MANILA, P. I. The Filipinos are our best friends in the Far East and we can be proud of the democracy we have helped them build. But we seem to have an irresistible proclivity for kicking our best friends in the seat of the pants.
This is especially true of congressmen. They no sooner get off their free government plane and check into their hotel, usually paid for by the government, but they issue statements calculated to undercut the American-Philippine alliance.
The tactics of some "ugly" American personnel in shutting themselves up in exclusive groups along Dewey blvd. or in military reservations has the same effect.
The Filipinos however are patient people. Despite the congressmen and the "ugly Americans" the alliance is still strong.
Pearson was an extremely influential syndicated columnist in the United States, and his column Washington Merry-Go-Round appeared in hundreds of U.S. newspapers, so his short-hand use of "ugly American" to refer to out-of-touch cocktail-party-focused U.S. diplomats is strong evidence that this interpretation of "ugly American" was firmly established by the end of 1959.
The authors strike back—to no avail
Perhaps the most interesting early instance is an article by Lederer and Burdick themselves, titled "Salute to Deeds of Non-Ugly Americans: Controversial Novel's Authors Urge Strong Foreign Aid, Telling of Devoted People Who, Like the Book’s Hero, Selflessly Help World Needy," in Life (December 7, 1959), which praises dedicated U.S. citizens whether they are employed by the government or working independently of it:
More than anything else we were depressed that so many readers should fail to appreciate the fact that thousands of "ugly Americans" overseas are doing practical work with a no-nonsense application of elbow grease. In a large sense we wrote our book to praise them. Thousands of Americans are performing their good works in the line of duty, as employees of the State Department, the International Cooperation Administration and other government agencies. Still others are doing it entirely on their own—which, in a way, makes their efforts even more spectacular.
Unmistakably, the authors are trying to reassert their original, rather startling view that the "ugly American" is the admirable American—but just as clearly, Life magazine is pushing in the opposite direction, insisting that U.S. citizens who perform good works abroad are "non-ugly." Thus the blurb for the article in the magazine’s table of contents reads as follows:
Not ugly at all
The authors of The Ugly American, the best-selling novel exposing U.S. bumblers abroad, tell about Americans in Asia whose work is handsome indeed.
To the extent that the authors had hoped to clarify that "ugly American" as a description of the character of Homer Atkins and real-life people like him, they were frustrated by Life’s effort to play up "non-ugly" as a character assessment. It is also noteworthy that Lederer and Burdick extend the category of "ugly Americans" to include people not employed by the U.S. government. Although popular usage reversed the meaning that they attempted to associate with “ugly American,” it agreed with them in making it applicable to any U.S. citizen abroad, as is evident in Kathy Gately, "Nancy Madden: A Summer Ambassador to Turkey," in the [Boston] Eight Eighty-Five (December 1959) [cited in KarlG’s succinct and informative answer]:
Summer '59 brought Nancy Madden to Newfoundland, Scotland, Frankfort on the Rhine, and finally her ultimate destination, Ankara, Turkey, where she joined her Navy family. Nancy was not the typical tourist, the "ugly American." She had come to live and to learn.
The Ugly American was a tremendously influential—and somewhat widely read—novel. Daniel Runde, "Are Americans as 'Ugly' as Ever," Foreign Policy (February 2018), asserts that “The Ugly American is easily the Silent Spring [Rachel Carson's book about the effects of widespread use DDT and other pesticides] of U.S. diplomatic and foreign assistance policy.” In particular, Runde says,
The novel, however, is credited with spurring a massive reorganization of America’s economic and diplomatic engagement with developing countries then emerging from European colonialism. [President John] Kennedy set about taking a series of sweeping steps in 1961: He set up the Alliance for Progress in Latin America, added to U.S. Army special forces (the Green Berets), proposed the reorganization of foreign assistance through the 1961 Foreign Assistance Act, and created the Peace Corps.
At least some of these steps represent parts of a considered effort to change the face of U.S. presence abroad from cocktail party diplomacy conducted by foreign policy dilettantes to on-the-ground service by dedicated personnel trained to work cooperatively and respectfully with the people of their host countries.
Nevertheless, the authors’ decision to name the novel after the physical appearance of its most admirable character was very quickly misunderstood by the U.S. public—many of whom, no doubt, knew the book only by its title and by its reputation for criticizing U.S. diplomatic fecklessness and hubris. Such popular misunderstandings are not unusual in connection with books that are much more talked about than read.
By March 30, 1959, widely read newspaper columnists were already misrepresenting the meaning of "ugly American" in the novel, encouraging the spread of the popular misconception that "ugly American" in the book referred to an out-of-touch, self-interested career diplomat with no feeling for the country in which he or she is serving.
By the end of December 1959, examples began to appear in which the meaning of "ugly American" extended beyond government functionaries to include private U.S. citizens working or even just vacationing abroad. Although the authors of the novel sought in a Life magazine article to reestablish "ugly American" as an epithet of honor, the tendency of popular usage was firmly against them and ultimately swept away their counterintuitive understanding of the term.