When your tranny "gear hunts", the internal components in your transmission work harder and get hotter, like 90K5 said above. In addition, your tranny cools itself by circulating it's own fluid out to the cooler and back.
If you are in overdrive at city speeds, every time you let off the pedal, the tranny will drop to OD, but even a small ammount of load will kick her back down into D. This causes heat buildup. Now add to the equation the fact that in OD your tranny fluid circulates about 30% slower. Not only do you have a higher than normal operating temperature, you also have a less efficient cooling system. Basically, you're slowly frying your transmission.