It was founded in 1921 in the western Jezreel Valley by veteran pioneers of the Second Aliyah, some of whom had been members of the first kibbutz, Deganyah. The 80 settling families each received 25 acres (100 dunams) of land, and then proceeded to drain the malaria-infested swamps, which had prevented two previous attempts at settlement.

The village layout in Nahalal, devised by architect Richard Kauffmann, became the pattern for many of the moshavim established before 1948; it is based on concentric circles, with the public buildings (school, administrative and cultural offices, cooperative shops and warehouses) in the center, the homesteads in the innermost circle, the farm buildings in the next, and beyond those, ever-widening circles of gardens and fields.

In 1929 a Girls' Agricultural Training Farm was established at Nahalal by WIZO (Women's International Zionist Organization), and in the 1940s it became a coeducational farming school of the Youth Aliyah movement. Nahalal is now one of the principal centers of the moshav movement, with a population of about 1,300. In biblical times, Nahalal was a town in the territory of the tribe of Zebulun, the exact site of which is still in dispute