The region surrounding this small farming community was first explored by Europeans in the 1840s; the town was surveyed in 1859. Its name is believed to derive from an Indigenous word "gnarrallah", meaning waterhole or swampy place. Following European settlement, the history of the area is entwined with two famous pastoral homesteads in the vicinity of Allora: Glengallan and Talgai. Both properties ran sheep. The original 'Talgai' run was taken up by E.E. Dalrymple in 1840. The creek that runs through Allora is named in his honour. Built in 1868 for the Clark family, Talgai homestead stood on 300,000 acres (1,200 km²). The homestead is built of sandstone and covers sixty squares. It is now a bed and breakfast. In 1884 the first fossil evidence of early human occupation, the Talgai skull, was found on the station, embedded in the wall of Dalrymple Creek. Radiocarbon dating suggests the Talgai skull is between 9,000 and 11,000 years old.
From the 1870s, red cedar, pine and beech logged from the Goomburra valley were milled at Allora.
Local attractions include the Goomburra Forest Reserve, part of which was World Heritage listed in 1994 by UNESCO. The Talgai skull is located in the Shellshear Museum, Department of Anatomy, Sydney University. A replica is found in the Allora Museum.