Why aren't the myths circulating out there called "rural legends" ? (Especially if a UFO lands in a cornfield and the locals are temporarily abducted)
An urban legend is a tale which purports to actually be true, but which has little basis in fact--or at least a highly contested factual basis. What makes urban legends "urban" is the fact that they're set in contemporary, urban settings and are widely believed today, as opposed to more traditional legends and myths which are set further in the past and are largely disbelieved by modern audiences. See: http://en.wikipedia.org/wiki/Urban_legend
I believe the original term for these sorts of things (certainly the term I heard first) was urban folklore, so called to distinguish it from ordinary folklore which is the prerogative of bumpkins. Turning folklore into legend seems simple enough; the two are close enough in meaning.
This source here notes the alternative urban myth.
Sadly I can't provide evidence other than my own recollection for any of this.
In the Oxford English Dictionary, the earliest example of "urban legend" is from a 1931 Vanity Fair article. The entry says the term is of US origin.
Question: Why are they called 'urban' legends?
Answer: Fair question, given that urban legends don't always take place in urban settings, nor are they exclusively told in big cities. It's helpful to note that urban legends are also called contemporary legends, a term that's more literally accurate and preferred by some folklorists.
Various other names have been suggested and applied, but urban legend stuck, presumably because it distinguishes in a picturesque way between the kinds of legends told in bygone days, primarily by rural folks in rural settings, and those we tell now (although, in truth, many "contemporary" legends borrow motifs and storylines from traditional folktales of the past). It's also evocative of a recurrent theme in contemporary legends — what one might call the "dark side" of modern life — namely, that new isn't necessarily better, and that many of the changes wrought by modernity, exemplified first and foremost by the impersonal hustle and bustle of big-city life, have come at the cost of the safety, sanity and sense of community our forebears enjoyed.
The Phrase Finder discusses the related "urban myth" and dates the first reference of "urban legend" to a 1925 New York Times article, but it had a different meaning. However:
The first reference I can find to 'urban legend' in the sense we mean here is Richard M. Dorson Our Living Traditions, 1968:
"Urban legends deal with the ghostly hitchhiker, the stolen grandmother, and the death car."
BY MORRIS MARKEY
EDITOR'S NOTE: The folk lore of a metropolis is rather likely to be on the sombre side, since paved streets and shadowed corners and the stir of millions do not produce idylls. Mr. Markey has collected a handful of the most persistent urban legends — of the sort that usually are told with the familiar preamble: "You can really believe this because it happened to a very close friend of my Aunt Maria's."
I don't know who invented the phrase, but current usage is to distinguish this type of legend from the "ordinary" legends of presumably primitive, ignorant rural people. It's not necessary to say "rural legend" because the implication is that that is the ordinary kind of legend. It's like, we say "a bitterly cold day" to imply a day that is way colder than most. There's really no word for a day that is cold but not bitterly cold, other than to say "a cold day".
When you think about it, the term is a little presumptuous. It assumes that city dwellers are smarter and more sophisticated than rural people, and so do not believe and spread the silly stories that those rural people do. But then the speaker is surprised to discover that city people have similar "legends".