The development of the Grail legend has been traced in detail by cultural historians: It is a legend which first came together in the form of written romances, deriving perhaps from some pre-Christian folklore hints, in the later 12th and early 13th centuries. The early Grail romances centered on Percival and were woven into the more general Arthurian fabric. Some of the Grail legend is interwoven with legends of the Holy Chalice.

The Grail plays a different role everywhere it appears, but in most versions of the legend the hero must prove himself worthy to be in its presence. In the early tales, Percival's immaturity prevents him from fulfilling his destiny when he first encounters the Grail, and he must grow spiritually and mentally before he can locate it again. In later tellings the Grail is a symbol of God's grace, available to all but only fully realized by those who prepare themselves spiritually, like the saintly Galahad.

There are two veins of thought concerning the Grail's origin. The first, championed by Roger Sherman Loomis, Alfred Nutt, and Jessie Weston, holds that it derived from early Celtic myth and folklore. Loomis traced a number of parallels between Medieval Welsh literature and Irish material and the Grail romances, including similarities between the Mabinogion's Bran the Blessed and the Arthurian Fisher King, and between Bran's life-restoring cauldron and the Grail. On the other hand, some scholars believe the Grail began as a purely Christian symbol. For example, Joseph Goering of the University of Toronto has identified sources for Grail imagery in 12th century wall paintings from churches in the Catalan Pyrenees (now mostly removed to the Museu Nacional d'Art de Catalunya, Barcelona), which present unique iconic images of the Virgin Mary holding a bowl that radiates tongues of fire, images that predate the first literary account by Chrétien de Troyes. Goering argues that they were the original inspiration for the Grail legend.

Another recent theory holds that the earliest stories that cast the Grail in a Christian light were meant to promote the Roman Catholic sacrament of the Holy Communion. Although the practice of Holy Communion was first alluded to in the Christian Bible and defined by theologians in the 1st centuries AD, it was around the time of the appearance of the first Christianized Grail literature that the Roman church was beginning to add more ceremony and mysticism around this particular sacrament. Thus, the first Grail stories may have been celebrations of a renewal in this traditional sacrament. This theory has some basis in the fact that the Grail legends are a phenomenon of the Western church (see below).

In several articles, Daniel Scavone, professor Emeritus of history at the University of southern Indiana, puts forward a hypothesis which identifies the Shroud of Turin as the real object that inspires the romances of the Holy Grail.

Most scholars today accept that both Christian and Celtic traditions contributed to the legend's development, though many of the early Celtic-based arguments are largely discredited (Loomis himself came to reject much of Weston and Nutt's work). The general view is that the central theme of the Grail is Christian, even when not explicitly religious, but that much of the setting and imagery of the early romances is drawn from Celtic material.

The word graal, as it is earliest spelled, comes from Old French graal or greal, cognate with Old Provençal grazal and Old Catalan gresal, meaning "a cup or bowl of earth, wood, or metal" (or other various types of vessels in Southern French dialects). The most commonly accepted etymology derives it from Latin gradalis or gradale via an earlier form, cratalis, a derivative of crater or cratus which was, in turn, borrowed from Greek krater (a two-handed shallow cup). Alternate suggestions include a derivative of cratis, a name for a type of woven basket that came to refer to a dish, or a derivative of Latin gradus meaning "'by degree', 'by stages', applied to a dish brought to the table in different stages or services during a meal".

According to the Catholic Encyclopedia, after the cycle of Grail romances was well established, late medieval writers came up with a false etymology for sangréal, an alternative name for "Holy Grail." In Old French, san graal or san gréal means "Holy Grail" and sang réal means "royal blood"; later writers played on this pun. Since then, "Sang real" is sometimes employed to lend a medievalizing air in referring to the Holy Grail. This connection with royal blood bore fruit in a modern bestseller linking many historical conspiracy theories (see below).

The Grail is first featured in Perceval, le Conte du Graal (The Story of the Grail) by Chrétien de Troyes, who claims he was working from a source book given to him by his patron, Count Philip of Flanders. In this incomplete poem, dated sometime between 1180 and 1191, the object has not yet acquired the implications of holiness it would have in later works. While dining in the magical abode of the Fisher King, Perceval witnesses a wondrous procession in which youths carry magnificent objects from one chamber to another, passing before him at each course of the meal. First comes a young man carrying a bleeding lance, then two boys carrying candelabras. Finally, a beautiful young girl emerges bearing an elaborately decorated graal, or "grail."

Chrétien refers to his object not as "The Grail" but as un graal, showing the word was used, in its earliest literary context, as a common noun. For Chrétien the grail was a wide, somewhat deep dish or bowl, interesting because it contained not a pike, salmon or lamprey, as the audience may have expected for such a container, but a single Mass wafer which provided sustenance for the Fisher King’s crippled father. Perceval, who had been warned against talking too much, remains silent through all of this, and wakes up the next morning alone. He later learns that if he had asked the appropriate questions about what he saw, he would have healed his maimed host, much to his honor. The story of the Wounded King's mystical fasting is not unique; several saints were said to have lived without food besides communion, for instance Saint Catherine of Genoa. This may imply that Chrétien intended the Mass wafer to be the significant part of the ritual, and the Grail to be a mere prop.