A couple of thoughts. First, as to how the flame front got to the O-ring. As you say, the O-rings sealed the segments of the casing together. Each segment had its solid, rubbery propellant cast into it separately. Therefore, on a level with the O-rings there was a discontinuation of the propellant, an inevitable result of the segmented structure.
When the propellant was ignited the pressure build-up caused the individual segment cases to bulge out into a barrel shape. This would then allow the flame front to travel between the segments of propellant. As long as the O-rings maintained the seal then there wouldn't be an escape route for this flame front and so the pressure would be maintained. If the sealing putty and O-rings were burnt away, though - as happened to Challenger - then the situation is much worse.
As for how the explosion occured, the view is that the flame leakage impinged on one of the lower struts that attaches the rocket to the fuel tank. The strut eventually failed, which caused the rocket to rotate around the remaining top strut and puncture the Hydrogen tank. Mix that with the leaking Oxygen, plus the flame from the still-burning rockets, and you get the big bang.