It was named in 1907 and was a siding on the Chidlow to Northam section of the railway. The origin of the name is from nearby Woondowing Spring which is an Aboriginal word thought to come from Ngwundow, meaning "to lie down".
Following the decision of the government to construct the blast furnace and wood distillation plant (to produce charcoal) in 1943 at Wundowie, plans were made to develop the townsite. Lots were surveyed in 1946 and the town was gazetted in 1947. The iron works commenced production in 1948, and the railway station was opened in 1949. In 1974 the plant was sold to Agnew-Clough Ltd and the plant was upgraded. By 1979, a shortage of hardwood timber resulted in the saw mill being closed. By 1981 the mill ceased operation.
The railway line was continued for a while from Northam to service Wundowie - after the main closure of the Chidlows route and the opening of the Avon Valley route in 1966.