There had been an earlier settlement nearby at Punkalla, which was a port for Bodalla and Nerrigundah; a ruined jetty and timber mill can still be seen there. Gold was discovered nearby at Central Tilba in 1880 and a post office was opened at Corunna, but called Noorooma until 1882. There is still a street bearing this spelling in the town today
A township was surveyed at Narooma in 1883 and it was declared a port in 1884. Its school opened in 1886 and its post office in 1889. Transport to Narooma was first from the sea. From 1894 a hand-worked punt crossed Wagonga Inlet linking Narooma with Moruya. A daily mail coach ran through the town between Bega and Moruya.
Narooma was regarded as a tourist destination from the early twentieth century. The local oyster industry was established around 1900. The Uniting (formerly Methodist) Church on the Princes Highway dates from 1914. Together with the associated parsonage, it is regarded as an excellent example of the Australian Federation Carpenter Gothic architectural style.
In 1929 a petrol driven punt that had previously operated at Batemans Bay was installed. The Narooma bridge was the first major bridge constructed on the Princes Highway by the Main Roads Board as part of its efforts to develop the highway. The bridge was built between 1929 and 1931 and crosses the Wagonga Inlet. The bridge has three spans and is made of steel and concrete. It is one of two bascule span bridges of its type remaining in New South Wales in 2002; the other was being threatened with demolition in 2002. A footpath was added to the eastern (seaward) side of the bridge in 1960.
A fish cannery opened in 1937 or 1940 to process tuna and salmon. Salmon which visited the inlet annually were trapped and processed. It is said that during one of the annual visits a worker left the trap gate open which allowed a small number of fish to escape. The salmon never returned to Narooma and the cannery was closed
