I will answer (2) quickly: You can refer to my response to this other question: http://mathoverflow.net/questions/99643/why-does-bosonic-string-theory-require-26-spacetime-dimensions/99650#99650
In String Theory (physics) there are "quantum operators", and the relation they satisfy are precisely this Virasoro relation. And not just that, but $c=D$, the space-time dimension! So it is at least extremely important in unifying the theories of physics via strings, because this relation helps us determine the dimension of our universe. You can view this term proportional to the central charge as a "quantum effect" (i.e. it only appears when you take your classical system and quantize it).
Why $c=D$?: The propagation ("worldsheet") of a 1-dimensional string (fundamental physical object in the theory) in space-time (dimension $D$) is described by functions $X^\mu$, where the index $\mu$ ranges from 0 to $D−2$. They decompose into modes $a^\mu_n$ (for satisfying the string wave-equation). These modes end up mixing and defining quantum operators $L_m$, and the commutator-relations amongst these modes spews out the Virasoro relation with $c=D$.
As for some rigorous intuition which will help with question (1): $c$ can be regarded as multiplying the unit operator, and when adjoined to the Lie algebra generated by the $L_m$ it lies in the center of that extended algebra. (I picked this up when working through Becker-Becker-Schwarz String theory textbook).
