There are number of theories as to the origin of the shrine. According to Heinz Bechert and Paul Younger, the mode of veneration and rituals connected with Kataragama deviyo is a survival of indigenous Vedda mode of veneration that preceded the arrival of Buddhist and Indo-Aryan cultural influences from North India in Sri Lanka in the last centuries BCE, although Hindus, Buddhists and even Muslims have tried to co-opt the deity, rituals and the shrine. But according to S. Pathmanathan, the original Kataragama shrine was established as an adjunct guardian deity shrine to Skanda-Kumara within a Buddhist temple complex. This particular shrine then became idealized as the very spot where Valli met Murukan amongst local Tamils and Sinhalese, and Kataragama deviyo subsumed the identity of Skanda-Kumara and became a deity on his own right with rituals and pilgrimage. According to Pathmanathan, it happened after the 13th century CE when Murukan became popular amongst Tamils and before the 15th century CE when the poet Arunagirinathar identified the very location as a sacred spot. The deity among the Veddas is referred as O’ Vedda or Oya Vedda, meaning “river hunter”.

The first literary mention of Kataragama in a context of a sacred place to kandha-Murugan is in its Tamil form Kathirkamam in the 15th-century devotional poems of Arunagirinathar. Tradition claims that he visited the forest shrine when he composed the poems. According to his poems, the deity dwelt on top of a mountain. The first mention of Kataragama deviyo in the form Khattugama, as a guardian deity of Sri Lanka and its Buddhist relics, was in the Pali chronicle of Jinakalamali written during the 16th century in what is today Thailand. (see Jatukham Rammathep a popular Thai amulet, based on Khattugama, a deity from Sri Lanka) Kataragama village is first mentioned in the historical annals known as Mahavamsa written down in the 5th century CE. It mentions a town named Kajjaragama from which important dignitaries came to receive the sacred Bo sapling sent from Ashoka’s Mauryan Empire on 288 BCE. (According to Ponnambalam Arunachalam Kajjaragama is derived from Kârttikeya Grâma (“City of Kartikeya”), shortened to Kajara-gama.

The vicinity of the temple has number of ancient ruins and inscriptions. Based on dated inscriptions found, the nearby Kiri Vehera is believed to have been built or renovated around the 1st century BCE. There is an inscription, a votive offering to the Mangala Mahacetiya, apparently the former name of Kiri Vehera on the orders of one Mahadathika Mahanaga, a son of king Tiritara who ruled in 447 CE. There is also an inscription of Dapula I dated to the 7th century CE who built a sanctuary for Buddhist monks, but the inscription does not mention Kataragama by name. Nearby Tissamaharama was a trading town of antiquity by the 2nd century BCE, as indicated by Prakrit and Tamil Brahmi legends in coins and potsherds unearthed on the site.The region was part of the ancient kingdom of Ruhuna which played an important role in the political history of the island.

The medieval phase of the history of the shrine began with the arrival of Kalyanagiri Swamy from North India sometimes during the 16th or 17th century. He identified the very spot of the shrines and their mythic associations with characters and events as expounded in Skanda Purana. Following his re-establishment of the forest shrine, it again became a place of pilgrimage for Indian and Sri Lankan Hindus. The shrine also attracted local Sinhala Buddhist devotees. The caretakers of the shrines were people of the forest who were of indigenous Vedda or mixed Vedda and Sinhalese lineages. The shrines popularity increased with the veneration of the place by the kings of the Kingdom of Kandy, the last indigenous kingdom before colonial occupation of the island. When Indian indentured workers were brought in after the British occupation in 1815, they too began to participate in the pilgrimage in droves, thus the popularity of the shrine increased amongst all sections of the people.