According to all of the English classes and course I've taken through-out my school days, I have been taught that the proper use is "okay" because "okay" is actually a word. I think people simply go "O.K." because it's shorter and abbreviated (like how a lot of people will abbreviated the titles of Muppet movies).
But yeah, "okay" is correct. In fact, it must be, because according to my Spanish II course, okay in Spanish is "oquie" or something like that.