Molecular dynamics simulations of the perovskite oxide KNbO3 are performed with a first-principles effective Hamiltonian. They reveal the prevalence of local polar distortions with short-range chain-like correlations, present even in the paraelectric phase far above T-c. The ordering of these dynamically fluctuating distortions yields the observed temperature sequence of ferroelectric phases. The simulations also reproduce the essential features of diffuse x-ray scattering measurements and the weak temperature dependence of diffuse streak patterns observed by Comes et al. These local distortions suggest an order-disorder character for the transitions. Softening of optical phonon branches is observed in the same simulations not only near q = 0, suggesting a displacive character for the transition, but also over large regions of the Brillouin zone. Dynamic real-space chains thus provide a unified framework for understanding both the order-disorder and displacive characteristics of these phase transitions.