To create a Tumblr App, go and visit: http://www.tumblr.com/docs/en/api/v2.
You need to be logged in to your Tumblr account to be able to access their developer page. So first, login to your Tumblr account and then follow the link above to get to their developer page. This should look similar to the one shown in the image below:
On that page click on the "register application" link. Now the "Register your application" page does load. On that page enter all the information which do contain a star. They are required. See image below
Note: When you enter the URL of your website in to the "Callback URL" field, make sure that it does match the URL of your website 100%. This means, if you go to your website and then check the URL in the browser and the URL does look like http://www.domain.com then you need to enter the exact same URL. If your website URL is http://domain.com then you need to enter it that way, without using the www at the front of the name.
When you copy and paste all the needed IDs and Keys, make sure, that you don't have any empty spaces, either at the beginning nor at the end of these entries. If you have any empty spaces, then the Application won't work and will show an error message when you try to connect to the App.
After you entered the Consumer Key and Secret, click on the "Save Changes" button within the plugin's settings page.