The first volcanoes in the Atitlán region popped up 150,000 years ago, but today's landscape has its origins in the massive Los Chocoyos eruption of 85,000 years ago, which blew volcanic ash as far as Florida and Panama. The quantity of magma expelled from below the earth's crust caused the surface terrain to collapse, forming a huge, roughly circular caldera that soon filled with water - Lago de Atitlán. Smaller volcanoes rose out of the lake's southern waters thousands of years later, reducing the lake's surface area but creating dramatic volcano vistas. At a depth of more than 300m (984ft), Atitlán is Central America's deepest lake.

The area around Lago de Atitlán was settled by indigenous Mayan communities from around the 13th century: Tz'utujil to the west, south and southeast, with their capital at Chuitinamit near Santiago Atitlán; and mostly Kaqchiquel on the north and northeast sides of the lake. When the Spanish arrived in 1524 the Kaqchiquels allied with them against the Tz'utujils, who were defeated in a bloody battle at Tzanajuyú. The Kaqchiquels subsequently rebelled against the Spanish and were themselves subjugated by 1531.

The Spanish built a church and monastery in Panajachel and used it as a base to convert the indigenous population to Catholicism.

Lago de Atitlán remained a quiet highland backwater for centuries until the 1960s, when it began attracting foreigners and hippies lured by its laid-back, lakeside lifestyle. The peace was tragically shattered during the Guatemalan Civil War when the highlands and lake area were targeted heavily by guerrillas and the government army alike. During the 36-year war merciless death squads killed with impunity, villages were razed and tens of thousands of refugees fled to Mexico. In 1990, 13 unarmed Tz'utujil Maya were massacred by the army during a protest in Santiago Atitlán. In the subsequent outrage the army was kicked out and the lake town became the first 'military-free zone'. That unprecedented success was a watershed event for the Mayan and human-rights causes in Guatemala.

When the war came to an end with the Peace Accords in 1996, foreigners gradually started drifting back to Panajachel and tourism has once again become a major part of the economy.

In October 2005, Hurricane Stan slammed into the west coast of Guatemala, killing hundreds and leaving thousands homeless. One of the hardest-hit areas was around Lake Atitlán, with mudslides causing the most destruction. At Panabaj, a village behind Santiago de Atitlán, hundreds were buried under a mudslide as they slept. Homes were also destroyed in Panajachel.

Although Panajachel's popularity with tourists has led to the nickname Gringotenango (place of the foreigners), Lago de Atitlán still has a large indigenous population and strong Mayan traditions. Traditional markets, colorful Mayan textiles and clothing, and Tz'utujil oil paintings can be found in the villages around the lake.