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By default, WordPress replaces the %category% permalink tag in a custom permalink structure with the entire hierarchy of categories for the post’s first matching category. For example, assuming your site has a hierarchical category structure like so:

Applications
  |_ Desktop
  |_ Web
    |_ Wordpress

By default, if you have a permalink structure defined as %category%/%year%/%monthnum%/%day%/%postname%, your post titled “Best Plugins” assigned to the “WordPress” category would have a permalink of:

http://www.yourblog.com/applications/web/wordpress/2008/01/15/best-plugins

If you activate the Single Category Permalink plugin, this would be the permalink generated for the post (and recognized by the blog):

http://www.yourblog.com/wordpress/2008/01/15/best-plugins

In order for a category to be used as part of a post’s permalink structure, %category% must be explicitly defined in the Options → Permalinks (or in WP 2.5: Settings → Permalinks) admin page as part of a custom structure, i.e. /%category%/%postname%.

For category links, %category% is implied to follow the value set as the “Category base” (or the default category base if none is specified).

1. Download the file single-category-permalink.zip and unzip it into your wp-content/plugins/ directory.
2. Activate the plugin through the ‘Plugins’ admin menu in WordPress.
3. Use %category% as a permalink tag in the ‘Options’ → ‘Permalinks’ (or in WP 2.5: ‘Settings’ → ‘Permalinks’) admin options page when defining a custom permalink structure

Assuming a category hierarchy of Vehicles -> Cars -> Ford, and a custom permalink structure defined as /%category%/%year%/%postname%, without this plugin being active the permalink for a post titled “Taurus” assigned to the “Ford” category would be:
http://example.com/vehicles/cars/ford/2008/taurus/

However, if this plugin were active, that link would instead be:
http://example.com/ford/2008/taurus/