The first evidence of human activity was found at Hoyles Mouth Cave, which is located at Longbury Bank and dates back to the Old Stone Age. Flint tools of Mesolithic and Neolithic have been found at various sites. Bronze Age remains are sparse but the contents of a round barrow at Giltar Cliff are at Tenby Museum. Likewise, a bronze axe found on the site of Strawberry Gardens.

The earliest known form of the village name, Pennalun, existed before the Normans arrived. It means 'headland' or 'hill top' of Alun. The stream in the village has now been culverted.

Penally was probably the birthplace of St Teilo, a Christian leader in the 6th century (a contemporary of St David). A monastery or 'clas' at Penally was endowed with lands lying between the Ridgeway and the Ritec. The stone crosses in the church would have been carved for the monastery in the 9th or 10th century but it is unknown when the monastery came to an end. Ruins of what was possibly St Deiniol's Chapel lie in the grounds of Penally Abbey and St Deiniols Well is nearby. The Abbey itself is a 19th century building.

When the Normans established themselves in the area, a little before 1100, Penally with Manorbier became a manor in the earldom of Pembroke. It was held until the 14th century by the de Barri family. Carswell Farmhouse and a tower house at West Tarr date from that time.

Trefloyne, a very ancient farm, now a golf course, existed before the Norman period. During the Civil War, it was used by the Earl of Carbery, the Royalist commander, as his local headquarters when it was held for the King by Thomas Bowen. In 1670 the Phillips family acquired the property and subsequently became the major landowner of the parish.

Penally Court Farm is an old and interesting property, in 1601 it was part of the Trefloyne estate. The present farmhouse was built around 1857. The name suggests a manorial function but little evidence exists for this. However, the oldest feature in the farmyard is listed Grade II by CADW and has been consolidated.

The Marsh is an interesting local feature with ruins of two buildings datingfrom the time it was tidal and navigable. The remains of Old Quay Cottage and the tidal mill at Penhoyle Farm date from this time.

There were several quarries in Penally, the largest is at Black Rock which is now part of Kiln Park holiday complex. There are notable lime kilns, still in good condition. They were last used around the time of the Second World War. The railway line came to Penally in 1864 when the link from Tenby to Pembroke and a short spur served Black Rock Quarry.

The original Village School started in what became the parish reading room - now the Church Room, next door to the Poor House - now Michaelmas Cottage. A new school was built in the eastern part of the village in 1863 and this closed in 2006.

The Parish Church of St Nicholas dates back to the 13th century and is built in the early English style and has a castellated tower containing five bells. The Church has beautiful stained glass windows dating from the early 19th century. The non conformists played a part in village life too and originally met in barns at the Court Farm, but eventually built a chapel in 1887, now a village residence.

The army has been part of Penally life since the middle of the 19th century when land was leased from Picton Estate and a firing range was built close to the dunes, a guard room and ammunition room were also erected. During the second World War the range was used to train men in the use of rifle mortars and grenades.