Though a small fishing village, Otakou is important in the history of Otago for several reasons. The name 'Otakou' is thought to come from Māori words meaning either "single village" or "place of red earth". Its original name was 'Otago' but European officials who had learned Māori in the North Island, visiting in the 1840s changed it to 'Otakou', believing that to be the correct form. In fact it isn't and 'Otago' is the correct southern Māori dialect word, as the earliest European records and the oldest Māori traditions both attest. But the myth is very much alive. Many people still believe that 'Otago' is a European corruption of 'Otakou'.
In its original form 'Otago' it was the name of the channel off Wellers Rock but was transferred to the lower harbour as a whole, the port, the nearby Māori settlements and the Weller brothers' whaling establishment - one of the region's oldest European settlements, having been founded in 1831. It was as the name of these it was converted to 'Otakou', which form is still used to refer to them today. The old Māori names for the Māori settlements were Te Ruatitiko, Tahakopa, Omate and Ohinetu.
Otakou was probably also the "city of Otago" burnt by Captain Kelly in December 1817 during the Sofia incident.
Prior to the arrival of European settlers, the place was a prominent Māori settlement, and it is still the site of Otago's most important marae. By the early 19th century, the three Māori iwi of Ngāi Tahu, Ngāti Māmoe and Waitaha had blended into a single tribal entity. The Treaty of Waitangi was signed nearby in 1840 on the H.M.S Herald by two important chiefs, who were descended from all three tribes. Ōtākou remains an important centre of Ngāi Tahu life.
Otakou is located close to Taiaroa Head, the site of an albatross colony and other wildlife such as seals and penguins. Local Maori still call Taiaroa Head by its original name, Pukekura, which was also the name of the pa established there around 1750 and still occupied by Māori in the 1840s, before the land was taken by the government under the Public Works Act for building the lighthouse and the fortifications used during the Russian Scare of the 1880s.