There are many legends associated with the temple. It is considered as one among the 108 great Shiva temples of ancient Kerala consecrated by Lord Parashurama himself.According to another legend the Rishi Mrikandu, the father of Rishi Markandeya got an idol of Lord Shiva in Kirathamoorthy form while bathing in Ganga. He heard an oracle that the idol be placed in a holy and befitting place. The Rishi searching for the apt location came to Kerala and ended up in the bank of Achankovil and established the temple in Kandiyoor.
According to another legend the temple is located at the site where Lord Shiva cut off Lord Brahma's head. The name Kandiyoor comes from name of Shiva Sri Kantan. It is believed that Lord Parasurama renovated the temple and gave tanthrik rights to Tharananallur family.
Kandiyoor and the temple have great significance in Kerala's history. The Kandiyoor temple is the earliest temple about which there is an epigraph about its origin in A.D 823 during the reign of Rajasekhara Varman.There was an era name 'Kandiyoorabdam' from the formation of the temple that was in widespread use until the introduction of Kollavarsham.It is also believed that the temple was once Hinayana Buddhist temple The kandiyoor(kannankara panicker family)It is also believed that it is this displaced shiva that was retrieved from the nearby paddy fields and placed near the Mavelikkara Sree Krishna Swamy Temple (Buddha Junction) in recent times
The Kandiyoor inscription (K. E. 393) dated 1218 says that Kandiyoor temple was reconstructed by Rama Kotha Varma of Odanad and the Kalasam ceremony was attended by devadicci Unni wife of Ravi Kerala Varma King of Venad after deliberations between the three.
Kandiyoor was annexed to Kayamkulam by Kayamkulam Rajah and later to Travancore by Marthanda Varma. It is believed that during the war between Odanadu and Kayamkulam the defeated Kayamkulam Raja surrendered his sword in the temple and left through the rear door which still remains closed after centuries.
The temple is mentioned in Unnuneeli Sandesam written around the 14th century.
Sri Kandiyur Mahadeva Shastrikal - a Sanskrit Scholar who wrote many Bhashyams for - Lalitha Sahasranamam, Lalitha Thrishati etc. lived in Kandiyoor.