There was a Dunoon long before there was a town. The castle that gave the place its name was raised in the twelfth century on a small, partly artificial conical hill above the Firth of Clyde. Only low walls remain now. It eventually became a royal castle with the Earls of Argyll, of Clan Campbell, as hereditary keepers; their rent to the sovereign was a single red rose. Mary, Queen of Scots, visited on 26 July 1563 and granted charters during her stay. The same Campbells were involved in the Dunoon massacre of 1646, when members of Clan Lamont, having surrendered, were killed by Campbell forces. The Clan Lamont Memorial on Tom-A-Mhoid Road, dedicated in 1906, commemorates the more than 200 Lamonts who died.

Modern Dunoon was built by engineering. As late as 1822 there were only three or four slated houses; the rest were traditional Highland cottages. James Ewing, an MP from Glasgow, built Castle House next to the old castle and the village began to expand. The construction of a 130-yard jetty in 1835 gave the steamers somewhere to call, and from then until the 1960s, holidaymakers travelled doon the watter from Glasgow and Lanarkshire to Dunoon's pier by the tens of thousands every summer. A directory from 1868 lists daily summer excursion sailings from Dunoon to Ardrishaig, Arran, Campbeltown, Loch Lomond, the Kyles of Bute, and a dozen other points. Today only the paddle steamer Waverley still calls in summer, and it berths at the breakwater rather than the historic pier.

In 1961, as the Cold War deepened, the US Navy submarine tender USS Proteus brought Polaris ballistic missiles and nuclear submarines into the sheltered waters of the Holy Loch at Sandbank, just north of Dunoon. For thirty years, Holy Loch was the home port of US Submarine Squadron 14. The Campaign for Nuclear Disarmament protested at the site, but for Dunoon itself the economic effects were enormous. Schools filled with American children, shops stocked American brands, dollars circulated alongside pounds. Then, in 1991, the base was deemed unnecessary. The last submarine tender, USS Simon Lake, left in March 1992. The economic shock was severe. In May 2012, a Scottish Agricultural College report on ninety rural places named Dunoon and Campbeltown jointly as those most vulnerable to further downturn.

The town has held onto its older identities. Mary Campbell, known as Highland Mary, was born at Auchamore Farm in Dunoon; she had a relationship with the poet Robert Burns, and the statue raised in her memory in 1896 still stands on Castle Hill, looking out over the Firth. The Cowal Highland Gathering, founded in 1894, fills the town with pipe bands and dancers on the final weekend of August every year. The Royal National Mod, the great festival of Scottish Gaelic, has been held in Dunoon many times, most recently in 2018. The Burgh Hall, the work of Glasgow architect Robert Alexander Bryden, reopened in June 2017 after restoration; it now houses exhibitions, performances, and a cafe.

Walk five minutes uphill from the seafront and the town disappears. Trails thread Corlarach Hill and the Bishop's Glen Reservoir, where one of three old water-supply reservoirs is now a freshwater fly-fishing loch. Seven miles north, on the road past the Holy Loch, Puck's Glen drops through a moss-walled ravine to the River Eachaig, and Benmore Botanic Garden, set in 150 acres of the old Younger estate, holds some of the tallest trees in Britain. The actor Sylvester McCoy, the football manager Neil Warnock, and the late Labour leader John Smith all spent formative time in Dunoon. The town gets nearly 2,400 millimetres of rain a year, very wet for a place at sea level. The hills hold the cloud, and the cloud holds the rain, and the trees take care of the rest.