Nue is said to be one of the most mysterious and feared youkai in many years, yet has been defeated by humans many times. There are many differing legends according to her appearance because she hides her "true form." At some point she was sealed underground, and because of the events started by Kanako Yasaka and Utsuho Reiuji, she resurfaced back in Gensoukyou.
Nue is a very mischievous girl who reacts badly to anyone finding her true form and enjoys some rather malicious pranks. Despite this, when she found out about how Byakuren's followers were friendly to youkai, she did feel a bit of guilt over her actions. Eventually she went to her temple to train.
Nue is able to conceal the true nature of other objects. An object that has lost its "identity" will appear to be a different thing depending on who observes it. The observer's brain will then attempt to fill in the blanks itself.
(Source: Touhou Wiki)