The island was originally chosen by the British as a comparatively isolated and healthier alternative to the disease-ridden larger islands of the Solomon Islands archipelago.
The first recorded sighting by Europeans was by the Spanish expedition of Álvaro de Mendaña on 16 April 1568. More precisely the sighting was due to a local voyage done by a small boat, in the accounts the brigantine Santiago, commanded by Maestre de Campo Pedro Ortega Valencia and having Hernán Gallego as pilot.
The Japanese occupied Tulagi on May 3, 1942, with the intention of establishing a seaplane base nearby (see Japanese Tulagi landing). The ships in Tulagi harbor were raided by planes from USS Yorktown the following day in a prelude to the Battle of the Coral Sea.
U.S. forces, primarily the 1st Marine Raiders, landed on August 7 and captured Tulagi as part of Operation Watchtower after a day of hard fighting.
After its capture by Naval and Marine forces, the island hosted a squadron of PT boats for a year which included LTJG John F. Kennedy's PT-109, as well as other ancillary facilities. A small 20-bed dispensary was operated on Tulagi until its closure in 1946. The island also formed part of Purvis Bay, which hosted many US Navy ships during 1942 and 1943.
The present-day Tulagi has a fishing fleet.
Tulagi offers some excellent scuba diving. The wrecks of USS Aaron Ward, USS Kanawha, and HMNZS Moa are close by, and the wrecks of Ironbottom Sound are not much further off. The Ward is considered to be one of the world's great wreck dives; the hull lies on a sandy bottom at 70 metres (230 feet), which is about 20 metres (66 feet) deeper than one can safely dive on compressed air. The Ward lies upright and intact, the deck replete with artifacts.
Tulagi is developing a tourism industry based on scuba.