The name 'Araluen' meant 'water lily' or 'place of the water lilies' in the local aboriginal language. At the time of European settlement Araluen was described as a broad alluvial valley with many natural billabongs covered with water lilies. Unfortunately, no such billabongs exist in the Araluen valley today. As with most river and creek valleys in south-eastern Australia, the natural landscape of Araluen Creek and its valley were completely destroyed by rampant and extremely destructive gold mining during the 'gold rush' in the latter half of the 19th century. The town experienced a decline after a flash flood in 1860 virtually destroyed the town, killing 24 people.
Araluen experienced a great population increase during the gold rush. Two rare plants growing in the area are the Araluen Gum and the Araluen Zieria.