From at least the 6th century BC, Cephalonia was organized into four independent city-states — a federation the ancients called the tetrapolis. Pale (site of modern Lixouri), Cranii (modern Argostoli), Same (modern Sami), and Pronnoi each minted their own coins and built their own temples and fortifications. All four allied with Athens during the Greco-Persian Wars; two hundred hoplites from Pale fought at the decisive Battle of Plataea in 479 BC against the Persians. A musician from Cephalonia named Melampous won the Lyre and Song contest at the Pythian Games at Delphi in 582 BC. On Mount Ainos — the island's highest peak, at 1,628 metres, darkened by its ancient forests of Abies cephalonica, the Cephalonian fir — Strabo recorded a sanctuary dedicated to Zeus Ainesios. Hesiod mentioned it too, and European explorers in the 18th and 19th centuries found its remnants on the summit. The mountain's firs gave the ancient world timber for ships; they still crowd the upper slopes today inside a national park.

Venice absorbed Cephalonia definitively by 1500, and held it for nearly three centuries. The Venetian period shaped much of what the island looks like today — and much of what it lost in 1953. Because of the relatively liberal atmosphere under the Venetian governor Marcantonio Giustinian (1516–1571), Hebrew books were printed on the island and exported throughout the eastern Mediterranean. In 1596, the Venetians built Assos Castle on a dramatic headland in the north, still one of the island's most visited landmarks. For two centuries, from the 16th to the 18th, Cephalonia was among the world's largest exporters of currants — small dried grapes, the 'Zante currant,' that flavoured the breads and puddings of northern Europe. The island ran a large merchant fleet and commissioned ships from as far away as the Danzig shipyard. Its prosperity was real, if precarious. Villages were built high on hilltops to avoid the pirates who terrorized the Ionian Sea during the 1820s — a geography of fear that shaped the landscape.

By 1809, the British had blockaded and occupied the Ionian Islands, installing provisional governments and beginning public works. Colonel Charles Philippe de Bosset, serving as provisional governor from 1810 to 1814, built the long stone bridge across the Argostoli lagoon that still bears his name. The Treaty of Paris in 1815 formalized British control through the United States of the Ionian Islands — a protectorate in all but name. By the 1840s, Greek nationalist sentiment was hardening. Calls for enosis — union with Greece — provoked rebellions in Argostoli and Lixouri. In 1849, Governor Sir Henry George Ward suppressed one such rebellion harshly: 21 people were hanged, several were shot, and hundreds were flogged. The brutality did not extinguish the desire for union. In 1864, with the British-supported Prince William of Denmark enthroned as King George I of the Hellenes, the Ionian Islands were transferred to Greece as a gesture of goodwill. After nearly seven centuries of foreign rule, Cephalonia became fully Greek.

World War II brought occupation, and then atrocity. Until September 1943, the island was held primarily by the Italian 33rd Infantry Division Acqui — about 12,000 men, alongside approximately 2,000 German troops. When the Allies concluded an armistice with Italy in September 1943, confusion engulfed the garrison. The Italians wanted to go home. The Germans wanted their weapons. Neither side trusted the other. The Italian soldiers voted, in a referendum among themselves, to fight rather than surrender. After a week of combat — with the fighting climaxing at the siege of Argostoli — the Germans prevailed. Approximately five thousand of the nine thousand surviving Italian soldiers were then executed in reprisal. It was one of the largest massacres of prisoners of war in the European theatre. Louis de Bernières based his novel Captain Corelli's Mandolin on these events. A small museum in Argostoli honours the Italian dead; the Italian president has visited to pay respects.

In August 1953, a series of four earthquakes struck the island. The third and most destructive, on 12 August at 11:24 local time, measured 6.8 in magnitude. Its epicentre lay directly south of the island's southern tip. Virtually every house on Cephalonia was destroyed — the only significant exception was the village of Fiskardo in the far north, sheltered by its location. The quake physically raised the entire island by 60 centimetres; the evidence is still visible in water marks on coastal rocks. Thousands of people — facing destroyed homes, destroyed livelihoods, and a destroyed economy — left, emigrating to Athens, Patras, America, and Australia. The population, which had reached 70,000 in 1896, fell sharply and has hovered between 35,000 and 42,000 ever since. Those who remained rebuilt. The capital Argostoli rose again, street by street, on the same grid, with the same stubborn pride.