Prior to European settlement the area was occupied by the Bunurong Aborigines. It is from their language that the town's name derives - 'ku-wirup' allegedly meaning 'plenty of blackfish' or 'blackfish swimming'.
The first European to closely scrutinize the shoreline of Westernport was William Hovell in 1826-27. Hovell had accompanied Captain Wright on his abortive attempt to establish an agricultural and military settlement on Phillip Island and then at Corinella. At the time the area was largely covered by 100 000 acres of swampland, spanning from Sawtell's Inlet on Westernport Bay to Bunyip in the north-east (see entry on Pakenham). Impressed with the grassy flats at the southern edge of the marshes, Hovell attempted to head north to the ranges but was forced to abandon his efforts after 15 or 20 km as the marsh proved such an obstacle, permitting the party to travel only about 6 km in six hours. However, Hovell was so impressed with the quality of the country that he made another attempt to head north after returning to Westernport Bay but again failed to make much headway.
In 1840 Paul Edmund de Strzelecki passed along the northern shore of Westernport during his overland expedition from the Murrumbidgee River through Gippsland to Melbourne.
The first pastoral runs in the area were established in 1839. However, interest in the area was delimited by the swamp and the fact that a dense morass of peat lay beneath the surface of the water, formed by decomposed rushes and reeds. This rendered clearing extremely difficult.
Private landowners made attempts at establishing drains to clear the swamp in the 1860s and 1870s with little success. However, areas of the swampland were opened up for selection after 1865 and local landowners applied pressure on the government to undertake drainage works, adding the fillip that reclamation works would ultimately attract more rates. Consequently, 9000 acres of marginal swampland were auctioned off in 1875 with a drainage fee added as part of the purchase price. However, the Lands Department then did nothing to initiate works, so the local landowners formed a committee and undertook the drainage works themselves, utilising the aforesaid fees. 100 contract labourers were hired and the drains cut by hand under adverse conditions.
In the late 1880s the construction of the Great Southern Railway necessitated the crossing of the swamp which was completed by means of a series of pile bridges in 1889. Immediately thereafter work began on the construction of the main canal, which would eventually extend over 15 km, but these efforts were interrupted by massive floods in 1891. In 1893, with an economic depression under way, contract labour was suspended and the work handed over to unemployed married men who were contractually bound to accept and improve a 20-acre block of their own while also working on the general drainage scheme. Their families soon followed and primitive housing was gradually replaced by weatherboard structures.
However, more floods in 1893 proved the main drain inadequate and the nascent efforts at cultivation were despoiled. The settlers found the 20-acre blocks too small to render profitable and successfully agitated for larger allotments. They also managed to overturn legislation forbidding them to transfer their land to existing landowners. This allowed new, more experienced farmers from other districts into the area. However, changes were slow and disastrous floods in 1900 and 1934 led to further drainage works. Remaining areas of reclaimed swamp were divided up for soldier settlement schemes after World War I. Only a small amount of wetland remains today.
The settlement was known as Yallock Settlement until the railway arrived and the station was named Koo-wee-rup. The town developed into a service and railway centre to the surrounding agricultural and dairy farms.
A mill was established in 1941 to treat flax which was being grown in the area.