Originally the town was to be named Mount Corhanwarrabul, but due to the problems that were foreseen with the spelling and pronunciation of this name, the Surveyor-General's office opted to name it Mount Dandenong. However, today there is still a Mount Corhanwarrabul, which is on the site of Burkes Lookout. The town of Mount Dandenong was settled in 1893, along with a neighbouring town, Olinda. It was around this time that the Government established 10-acre (40,000 m) farms that would be used to harvest timber.
By around 1900 the town had its own general store and primary school. The Post Office, opened in 1902, was closed and replaced by one at Kalorama in 1991. In 1922 the first motorcars were seen in operation in Mount Dandenong.
In 1938, the 1938 Kyeema Crash occurred eighteen people were killed when the Kyeema, an Australian National Airways DC-2, VH-UYC crashed.
Around 2002 it was proposed that the word "Melbourne" be erected in large letters at the peak of the mountain in the style of the Hollywood sign, visible from the city centre. This was met with outrage from local residents and was not pursued
