The first European to see the Terowie-Hallett area was probably the explorer Edward John Eyre who passed through the district in July 1839. By 1842 John and Alfred Hallett, early pastoralists, had settled in the area and the following year more land was taken up in the area by John Chewings, William Dare, George Hiles, Dr William James and Dr John Harris Browne.
The Hundred of Terowie was surveyed in 1871. John Mitchell purchased land in 1873 and built the town's first pub, the Terowie Hotel, the following year. A store and a blacksmith soon followed.
Terowie was gazetted in 1877. Three years later the railway arrived making the town a natural regional centre. This led to intense settlement of the district (the population of the town was almost 700 by 1881) but the droughts of the 1880s, combined with the proliferation of rabbits, soon made the smaller land holding uneconomic. However the railway continued to sustain the town's importance. It was the vital link between Adelaide and New South Wales and was the place where the two different railway gauges met. At its peak Terowie had over 3 km of railway tracks in its yards where men worked in workshops, engine sheds and the shipping yards. The town's population, at its peak, reached 2000.
During World War II there was an army camp established at Terowie. It was here that General Douglas MacArthur made his famous speech: 'I came out of Bataan and I shall return.' There is a plaque at the railway station which commemorates the event.
In 1969 the broad railway gauge was extended and Terowie's importance declined. Very quickly the population dropped to the low hundreds. By the 1980s the railway line had been removed. The town's very reason for existence had been removed.