Prior to European settlement, the Cranbourne area was known as mar-ne-bek by the Boonwurrung people. The name mar-ne-bek means excellent country. The first Europeans arrived via Tasmania in 1836 with the area opening up to settlers in the 1860s. The name Cranbourne has two possible origins: the first European who settled permanently in the area operated the Cranbourne Inn which was named after a town in Berkshire, England. It is also possible that it was named after Viscount Cranborne (slightly different spelling) who was born in 1821 and died in 1865. His brother succeeded to the title and later became the Marquis of Salisbury in 1868 when their father died. Salisbury became the British Prime Minister on three occasions between 1885 and 1902.

The site of Cranbourne was reserved in 1852 but not surveyed until 1856 and proclaimed a town in 1861. A Presbyterian church was founded in Cranbourne in 1855 with the Catholic and Anglican churches founded in the early 1860s. It was in the 1850s that Cranbourne attracted some attention when a farmer discovered a meteorite while ploughing a paddock with several more meteorites subsequently being discovered.

Dairy farms and horse studs were established in the area from the 1860s as well as a cattle market from the 1870s, whilst the railway arrived in 1887. Farming and animal breeding played an important role in the economy of the town with Italian immigrants starting market gardening after World War I. Later economic developments in the manufacturing sector would cause Cranbourne to grow rapidly after Word War II, with expansion continuing at a rapid rate.