For many thousands of years prior to British colonisation, the Koroit area was part of the lands of the indigenous Koroit gundidj people, whose descendants retain special links with the area.

The first confirmed European sighting of the area was of Tower Hill, the nearby inactive volcano, in 1802, by French explorers aboard Géographe, captained by Nicolas Baudin. The first European settler came to the Koroit area in 1837. During the 1840s and 1850s, a large number of Irish immigrants made Koroit their home. A strong and obvious links between Koroit and Ireland is the potato crops grown in the rich volcanic soil surrounding the town.

The township of Koroit was surveyed and the first town allotments were sold in 1857. A post office opened on 23 April 1858. Eight sites in Koroit are listed in the Register of the National Estate.

What became the Port Fairy railway line was extended to the town from Warrnambool in 1890, along with a branch to Hamilton, both being closed in 1977.

Koroit was originally part of the Shire of Belfast, Belfast being the original name of nearby Port Fairy. In the latter part of the 19th century, the township of Koroit separated from the Shire of Belfast and became the Borough of Koroit on 7 October 1870. In November 1870, nine new councillors were elected from fourteen candidates. On 10 December 1870, the new Borough of Koroit elected its first mayor. In 1985, the Borough of Koroit was merged with the Shire of Warrnambool and became part of the Shire of Moyne in 1994.

The Koroit Magistrates' Court closed on 15 June 1977, not having been visited by a magistrate since 1972.

The author Henry Handel Richardson lived in the Koroit post office as a child after her family moved to Koroit in 1878. Remembering Koroit from her youth, the third volume of her The Fortunes of Richard Mahony trilogy is set in the town. When the author was six, her father Walter died in Koroit on 1 August 1879 and was buried at the Koroit cemetery.