I imagine that it started out as a screwdriver, but the Doctor is endlessly tinkering with it to add a new function that he's just thought up... which makes every new absurd ability it displays all the more amusing to me.
Same here!!! My gf is a big Whovian, and she showed me this little thing on a tumblr page where Tennant's Doc is doing something with the screwdriver and River Song says 'use the red setting' to which he replied 'it doesn't HAVE a red setting'. River replied 'it will one day'. And in the episode two weeks ago with the Ice Warrior, low and behold, A RED SETTING!!!!
The Doc's been around for nearly a millenium now. If you had a electronic tool, and are as smart as the Doctor, you'd be able to add a function or 500 during all those years.