Rotational head movements cause the fluid in the cupula of the semicircular canal to "bend" the hair cells. The hair cells, in turn, send a signal to your brain that you are experiencing "motion".
Vertigo can occur when these hair cells are still sending signals of motion, even though you may be perfectly still, giving you the "illusion of movement".
Update Date 4/14/2013
Updated by: Linda J. Vorvick, MD, Medical Director and Director of Didactic Curriculum, MEDEX Northwest Division of Physician Assistant Studies, Department of Family Medicine, UW Medicine, School of Medicine, University of Washington. Also reviewed by A.D.A.M. Health Solutions, Ebix, Inc., Editorial Team: David Zieve, MD, MHA, Bethanne Black, Stephanie Slon, and Nissi Wang.