In prehistoric times the region of the park was occupied by Kaingang, collectors of fruit and seeds, and hunters.[1] The first European explorers gave the region the name "Canela" from a caneleira (cinnamon) tree under which they made their camp. The Wassen family of Germany arrived in 1863 and began farming and raising livestock.[2] The area has a pleasant climate and natural beauty of canyons, rivers and waterfalls. Hotels and vacation homes were built in the region, starting in 1900, before the town of Canela had been built.[1]

Apart from vacationers, the economy depended on trade in cattle, pigs and their products, which were taken for sale to Porto Alegre and neighboring municipalities. A logging industry developed, exploiting the huge forest of araucaria pines, and accelerated when the railway arrived in 1924. A pulp mill was built beside a tributary of the Arroio Caracol, which crosses the park, affecting the water quality. This and the destruction of the forests drove the tourists away. Many species of animals were also driven out, including the maned wolf (Chrysocyon brachyurus), which was hunted in the false belief that it killed cattle.[2]

The state government declared that the land covered by the park was of public utility in 1954. After legal expropriation the area was transferred in 1968 to the State Tourist Office of Canela. The Caracol State Park was established in 1973 with an area of 100 hectares (250 acres), of which 25 hectares (62 acres) is state-owned.[2]