The song was rumored to be about smoking dried banana skins, which was believed to be a hallucinogenic drug in the 1960s, but this rumor has since been debunked. According to Donovan's notes accompanying the album Donovan's Greatest Hits, the rumor that one could get high from smoking dried banana skins was started by Country Joe McDonald in 1966, and Donovan heard the rumor three weeks before "Mellow Yellow" was released as a single. (According to The Rolling Stone Illustrated Encyclopedia of Rock and Roll, he admitted later the song made reference to a vibrator; an "electrical banana" as mentioned in the lyrics.) The phrase "mellow yellow" appears on page 719 of the first American edition of Ulysses, where it is used to refer to Mrs Marion Bloom's buttocks, but it is not known if Donovan got the phrase from there.
The record had a "Beatlesque" feel to it, and was sometimes mistaken for a Beatles song. Donovan in fact was friends with the Beatles. Donovan had a small part in coming up with the lyrics for "Yellow Submarine" and Paul McCartney played bass guitar (uncredited) on portions of Donovan's Mellow Yellow album.
In France, Lipton used a modified version of the song to promote their tea ("They call me Lipton Yellow").
In 1999, "Mellow Yellow" was sung by a group of young adults—among which were then-unknowns Alex Greenwald, Rashida Jones and Jason Thompson—in Gap's "Everybody in Cords" commercial directed by Pedro Romhanyi. The music mix was done by the Dust Brothers.
Chart positions were #2 (USA) and #8 (UK).