There are two theories on the origin of the name "Casco Bay". Aucocisco is the Abenaki name for the bay, which means 'place of herons' (sometimes translated as 'muddy'). The Portuguese explorer Estêvão Gomes, mapped the Maine coast in 1525 and named the bay "Bahía de Cascos" (Bay of Helmets, based on the shape of the bay).

The first settlement in Casco Bay was that of Capt. Christopher Levett, an English explorer, who built a house on House Island in 1623–24. The settlement failed. The first permanent settlement of the bay was named Casco; despite changing names throughout history, that settlement remains the largest city in the Casco Bay region, now called the city of Portland, Maine

It was first reported in 1700 by Colonel Wolfgang William Römer, an English military engineer, that there were "as many islands as there are days in the year".[3] The United States Coastal Pilot lists 136 islands,[3] leading to the bay's islands being called the Calendar Islands based on the popular myth there are 365 of them. Later, Robert M. York, the former Maine state historian said there are "little more than two hundred islands".

At the time of European contact in the sixteenth century, people speaking an Eastern dialect of the Wabanaki language inhabited present-day Casco Bay. A number of Treaties were negotiated and signed between the British colonies and members of the Wabanaki Confederacy in Casco Bay, including the Treaty of Casco (1678), the Treaty of Casco (1703), and Treaty of Casco Bay (1727). The latter Treaty was the result of a Conference between the British and the Abenaki in August, 1727, at which the parties agreed to uphold the terms of the 1725 Treaty of Peace and Friendship which ended Dummer's War, and to cooperate with each other in keeping the peace. Chief Loron Sagouarram, who had signed the Treaty of 1725, addressed the gathering in 1727, providing his understanding of the Treaty relationship.

Casco Bay is also home to abandoned military fortifications dating from the War of 1812 through World War II; during World War II, Casco Bay served as an anchorage for US Navy ships.

Since Casco Bay was the nearest American anchorage to the Atlantic Lend-Lease convoy routes to Britain prior to US entry into World War II, Admiral King ordered a large pool of destroyers to be stationed there for convoy escort duty in August 1941. The State Historic Site of Eagle Island was the summer home of Arctic explorer Robert Peary.

Walter Cronkite stated that, in his opinion, the bay offered some of the best sailing in the world.[citation needed

In 2008, up-and-coming composers Peter J. McLaughlin and Akiva G. Zamcheck wrote a piece in four movements paying homage to the wreck of the Don in Casco Bay in 1941. The piece received critical acclaim from the Portland Press Herald and from fellow Maine composers. The "Don" was lost 29 June 1941 near Ragged Island.