Versions of the hammered dulcimer can be found throughout the world. In the Middle East it is called the Santoor, in Russia and the Ukraine it is a Cymbalom, in Spanish and Italian it is a Salterio, in German it is a Hackbrett ("chopping block"), and the Chinese name it a Yan Quin ("foreign instrument"). While some specifics vary between cultures (particularly shape, tuning, and number of strings per course), the basics remain constant.

The immediate precurser to the hammered dulcimer is the plucked psaltery, itself dating back to ancient Greece. The psaltery, a series of parallel strings strung over a soundboard, was modified to make it more easily played with a spoon, which later evolved into the dulcimer 'hammer'. Instead of all strings being in the same plane, strings were strung alternately up and down to present an easier target for the player. The psaltery continued as an instrument in its own right until the fifteenth century, and dulcimers continued to be plucked in the manner of a psaltery as well as stricken.

The dulcimer dates back at least as far as the twelfth century. Its earliest depiction is in an ivory-carved bookcover for Queen Mellisande's Psalter, or book of psalms, dating to 1136 and depicting King David playing the dulcimer accompanied by various viols. The exact provenance of the instrument is unknown, and complicated by the fact that the Psalter was a product of the Crusader Kingdom of Jeruselum. It could either have come east with the Crusaders or been an eastern instrument adopted by them in the manner of the lute. The evidence is further complicated by the fact that several thorough Arabic music treatises of the tenth and eleventh centuries make no mention of anything resembling the dulcimer. This could be because, at that point, the dulcimer hadn't varied enough from its origins to have been considered distinct from the psaltery.

The hammered dulcimer was extremely popular throughout Europe, and when translators for the King James Bible (which was released in 1611) were looking to translate a list of musical instruments in the book of Daniel they included the dulcimer. Daniel 3:5 was translated to the King James' "That at what time ye hear the sound of the cornet, flute, harp, sackbut, psaltery, dulcimer, and all kinds of musick, ye fall down and worship the golden image that Nebuchadnezzar the king hath set up". This verse was later re-translated and corrected in the New International Version to "As soon as you hear the sound of the horn, flute, zither, lyre, harp, pipes and all kinds of music, you must fall down and worship the image of gold that King Nebuchadnezzar has set up." The existence of this verse, in the King James Version, has significantly confused the issue of the dulcimer's origins, but no evidence exists that traces the dulcimer to ancient or Biblical times. The Latin Vulgate's version reads: "in hora qua audieritis sonitum tubae et fistulae et citharae sambucae et psalterii et symphoniae et universi generis musicorum cadentes adorate statuam auream quam constituit Nabuchodonosor rex."

The dulcimer is the direct ancestor of the piano, being the source of the string-striking mechanism. Prior to the piano, all keyboard instruments were either wind-driven (such as the organ) or plucked strings (as in the virginal and harpsichord). The problem with these instruments is that there is no way to vary volume for dynamic variation. In the seventeenth century this problem was solved by attaching a striking-keyboard to a dulcimer, to create an instrument that could play both loudly and quietly. In true Renaissance fashion it was named a 'soft-loud', or in Italian a pianoforte, which was later shortened to 'piano'.

Like the psaltery before it, the dulcimer continued to be used alongside the more evolved piano, particularly where pianos were hard to come by. When colonists came to the New World, a piano was a terrible thing to lug across the Atlantic when cargo space was a premium. But the dulcimer came - and one is listed on the cargo manifest for the Mayflower. Likewise with later pioneers heading into the western frontiers of America, wherever it was too difficult to take a piano the dulcimer came instead. The dulcimer has since continued in various local traditions which can still be found in Michigan; Texas; the Ozark regions of Arkansas and Missouri; and the Appalachian areas of Kentucky, Tennessee, and the Carolinas. The dulcimer's present-day association with Celtic music is a recent reintroduction from its traditional use in Bluegrass music.

An unrelated instrument, the mountain dulcimer, is also found in many of these Appalachian areas. The mountain dulcimer was created by Scotch-Irish immigrants homesick for the bagpipes. The relationship between the two instruments is more linguistic than musicological - the name refers to the Latin phrase for 'sweet-sounding'. The mountain dulcimer's name might also have been inspired by the King James Bible. In order to create an instrument with a similar drone, they modified a cittern fretboard (with diatonic fret positions, such as were common in France and Scotland) to a different style of soundboard to create the hourglass and teardrop dulcimers that are common today.