'owend' isn't a word either. It's 'owned', as in 'conquered severely'. The 'p' is right next to the 'o' on the keyboard, so if you're in a hurry, you might hit the 'p' by accident. And people did. And it caught on.
Pwned is a corruption of the word "Owned." This originated in an online game called Warcraft, where a map designer misspelled "owned." When the computer beat a player, it was supposed to say, so-and-so "has been owned."