The ancient Sanskrit phrase Lakshadweepa referred to the Islands of Laccadives, Maldives and the Chagos Archipelago as well. The Chagos islands were ruled from India originally, although never settled.

Maldivian mariners knew the Chagos Islands well. In Maldivian lore Diego Garcia is known as Fōlhavahi or Hollhavai (the latter name in the Southern Maldives Adduan dialect of Dhivehi) and Feyhandheebu is the Divehi name for Chagos. According to Southern Maldivian oral tradition, traders and fishermen were occasionally lost at sea and got stranded in one of the islands of the Chagos. Eventually they were rescued and brought back home. However, these islands were judged to be too far away from the Maldives to be settled permanently by Maldivians. Thus for many centuries the Chagos were ignored by their northern neighbours.

The first European explorer to spot the Chagos was Vasco da Gama in the early 16th century. Portuguese seafarers named the group and some of the Atolls, but they never made these islands part of their seaborne empire. They judged this lonely and isolated group to be economically and politically uninteresting.

The French were the first to lay a claim on the Chagos after they settled Réunion and Ile de France (later renamed Mauritius).

On 27 April 1786 the Chagos Isands and Diego Garcia were claimed for Britain. However, the territory was ceded to the United Kingdom by treaty only after Napoleon's defeat, in 1814. On 31 August 1903 the Chagos Archipelago was administratively separated from the Seychelles and attached to Mauritius.

The islands were retained as part of the British Indian Ocean Territory when Mauritius gained independence. Since 1976, the archipelago has been coterminous with the British Indian Ocean Territory, but it is also claimed by Mauritius. The archipelago's first inhabitants arrived in the 18th century. These were the lepers of Ile de France (Mauritius) who were brought there in the second half of the 1700s. Soon after, a plan was drawn up by the French to settle the Chagos and make them profitable. Workers for a massive French project to establish coconut plantations and produce oil were sent from Ile de France (Mauritius) and settled in some of the largest islands. Consequently, in some maps of the time the Chagos are known as the "Oil Islands". Most of these workers were of African origin, but it is likely that there were also a few South Indians among them. The supervisors of the plantations were probably Frenchmen and the workers were probably little more than slaves, but very little has been recorded about conditions on the islands during that time.

By the mid-20th century the oil plantations had largely failed, but the original workers and their families had settled some of the largest islands and survived there. The islanders were known as the Ilois (one French Creole word for "islanders") and they numbered almost 2,000. They were of mixed African and South Asian descent and lived very simple, spartan lives in their isolated archipelago. Few remains of their culture have been left, except for the ruins of a few dwellings and a stone church that can still be seen in Diego Garcia.

Suddenly, between 1967 and 1971, the entire population was forcibly removed from the islands and relocated to Mauritius to make way for a joint United States-United Kingdom military base on Diego Garcia. Apparently, the displaced people received an initial funding of some £650,000 for their rehousing from the British Government, but individual islanders saw little of those funds and ended up living in a slum in Mauritius. Many of the Chagosians committed suicide.

After negotiations in the late 1970s and early 1980s, the Government agreed to pay a further £4 million to the Chagossians. The Government says the total sums paid to the Chagossians amounts to £14.5 million in today's prices. Attempts by the Chagossians to secure additional compensation to this were dismissed by the High Court and Court of Appeal in 2003 and 2004 It later became clear that the Chagossians had been fraudulently reclassified as 'migrant workers' in order to facilitate the American military occupation of their home. The High Court had repeatedly found in favour of the Chagosians and it was only by means of a Royal Decree that the UK government was able to overturn the decision.

The court found that the Chagossians, as British dependent Citizens, had been unlawfully dispossessed and ordered that they be allowed to return to their home. It was only by means of the executive order that this was presented. The British government went so far as to commission a (widely discredited) report in which it suggested that the islands were uninhabitable despite currently being home to hundreds of American military personnel.

In the Chagos, the houses the Chagossians had abandoned fell slowly into ruin. Now the vegetation has taken over and in some islands it is difficult to discern where the village once had been. Yachtsmen passing through the archipelago often try to find the ruins and are unsuccessful.

Currently, the only human structures on the islands are located in the joint defence and naval support facility on Diego Garcia. Other uninhabited islands, especially in the Salomon group, are common stopping points for long-distance yachtsmen travelling from Southeast Asia to the Red Sea or the coast of Africa, although a permit is required to visit the outer islands.

For more information on the expulsion of the islanders and the court case, see the following 'Politics' section and the separate article on Diego Garcia.