The event was born in 1951 as a quickly improvised qualifier for the Monte Carlo Rally. Thirty Finnish drivers wanted to enter Monte Carlo, but only 14 could fit within the nationality quotas. A demand arose for a home event modelled on the Monte Carlo format, and in July 1951 Pentti Barck's proposal for an annual competition in Jyväskylä was accepted. The first rally began on 1 September 1951 under the name Jyväskylän Suurajot (Jyväskylä Grand Prix). Twenty-six entrants tackled a 1,700-kilometre route stretching to Rovaniemi in Lapland, through Kokkola and Oulu, and back to Jyväskylä. Victory went to Arvo Karlsson in an Austin Atlantic.
Throughout the 1950s the event evolved rapidly. The 1954 running introduced the international name "The Rally of the Thousand Lakes." By 1955, the number of special stages had grown to eleven — the highest count in any European rally at the time — and the event's modern format was taking shape. Sweden's Erik Carlsson became the first non-Finn to win in 1957. In 1959 the rally joined the European Rally Championship calendar and also counted towards the inaugural Finnish Rally Championship.
In the 1960s and 1970s the event was dominated by the so-called Flying Finns. Rauno Aaltonen, Pauli Toivonen, and Simo Lampinen — the first driver to take consecutive wins, in 1963 and 1964 — set the tone. Timo Mäkinen won in 1965 and 1966 in a Mini Cooper S, then took a hat-trick of victories, beating Lampinen by just eight seconds in 1967 despite covering the high-speed Ouninpohja stage with his bonnet open. Hannu Mikkola followed with three wins of his own, and the filmmaker Castrol produced a film titled Flying Finns in 1968 documenting their duel.
The 1970 event featured a record 52 stages across 460 competitive kilometres and drew an estimated 350,000–500,000 spectators. An estimated audience of similar size watched the 40th anniversary event in 1990.
The 1000 Lakes was not among the rallies guaranteed a place in the inaugural 1973 World Rally Championship, but the season's calendar was expanded to 13 rounds and the event secured a spot. Timo Mäkinen became the first driver to win the event four times and the first Finn to win a WRC round at that edition. The 1974 event was marred by the first fatal accident for a competitor in WRC history, when co-driver Seppo Jämsä died of injuries sustained in a crash at the Ouninpohja stage.
During the 1980s Hannu Mikkola extended his record to a still-standing seven wins. His 1983 time on the 24.5-kilometre Ouninpohja stage was 11 minutes 56 seconds — 52 seconds faster than his own time just four years earlier. Timo Salonen won in 1985 and 1986, capturing the drivers' world championship title in 1985 with three rounds still to run — the first time the title had been decided in Finland.
Until the late 1980s the field consisted almost entirely of Finnish and Swedish drivers, and only seven drivers from outside Finland or Sweden have ever won the event. The drought for outsiders ended when Toyota's Carlos Sainz became the first non-Nordic winner in 1990. Didier Auriol won in 1992, and Markko Märtin became the first Estonian winner in 2003 — the only time in the event's history when no Finnish driver reached the podium. Sébastien Loeb won in 2008 and again in 2011, making him the first non-Finn to win the event twice.
Marcus Grönholm of Finland dominated the 2000s, winning the 50th running of the event in 2000 and matching Mikkola's record of seven wins in 2007, becoming the first driver to win the same WRC event seven times. In 2005 Grönholm set the still-standing record for the highest average speed at a WRC rally: 122.86 kilometres per hour.
Rally Finland averages among the highest speeds of any rally in the world. Of the nine fastest-ever WRC rallies by average speed, eight are editions of Rally Finland; the event averaged 125.4 km/h in 2015. The high number of jumps also earned it the nickname "The Rally of the Thousand Jumps." Formula One world champion Kimi Räikkönen described it as "probably the closest to asphalt driving as you can get on gravel."
The rally's most celebrated section is the Ouninpohja stage, famous for its high-speed jumps and sweeping corners. At a jump six kilometres from the start line, located near a landmark yellow house, spectators mark the distance of competing cars in the air. In 2003 Markko Märtin set the record for the longest jump, travelling 57 metres at a speed of 171 km/h. The stage has periodically been split or removed for safety reasons: it was excluded in 2008 when average speeds exceeded FIA limits, before returning in 2012 as a power stage.
The World Rally Championship teams voted Rally Finland "Rally of the Year" in 1998, 2002, 2003, and 2004. Along with Wales Rally GB, it is one of only two events to have featured in all but one WRC season. The city of Jyväskylä has served as the rally's hub throughout its history, with the headquarters relocating to the Paviljonki congress centre from 2000 onward. The event remains among the most popular and prestigious fixtures in world rallying.