Kelpies are partly descended from Dingoes, with 3–4% of their genes coming from the native Australian dog. At the time of the origin of the breed, it was illegal to keep dingoes as pets, some dingo owners registered their animals as Kelpies or Kelpie crosses. Kelpies and dingoes are similar in conformation and colouring. There is no doubt that some people have deliberately mated dingoes to their Kelpies, and some opinion holds that the best dilution is 1/16–1/32, but that 1/2 and 1/4 will work. As the Dingo has been regarded as a savage sheep-killer since the first European settlement of Australia, few will admit to the practice.
The first dog called a Kelpie was a black and tan female pup with floppy ears bought by Jack Gleeson about 1872 from a litter born on Warrock Station near Casterton, owned by George Robertson, a Scot. This dog was named kelpie after the kelpie, a mythological shape shifting water spirit of Celtic folklore. Legend has it that "Kelpie" was sired by a dingo, but there is little evidence for or against this. In later years she was referred to as "(Gleeson's) Kelpie", to differentiate her from "(King's) Kelpie", her daughter.
The second "Kelpie" was "(King's) Kelpie", another black and tan bitch out of "Kelpie" by "Caesar", a pup from two sheepdogs imported from Scotland. However, challenges have been made[according to whom?] that these two sheepdogs were not from Scotland and may have had dingo blood. "(King's) Kelpie" tied the prestigious Forbes Trial in 1879, and the strain was soon popularly referred to as "Kelpie's pups", or just Kelpies. The King brothers joined another breeder, McLeod, to form a dog breeding partnership whose dogs dominated trials during 1900 to 1920.
There were a number of Kelpies named Red Cloud. The first and most famous was John Quinn's Red Cloud in the early 20th century. In the 1960s, another Red Cloud became well known in Western Australia. This started the tradition in Western Australia of calling all red or red and tan Kelpies, especially those with white chests, Red Cloud Kelpies. Other notable specimens include Gunner and Red Dog (c. 1971 – 21 November 1979), a Kelpie mix which was the subject of a movie, Red Dog, released in 2011.
Kelpies have now been exported to many countries including Argentina, Canada, Italy, Korea, New Caledonia, New Zealand, Sweden, the United Kingdom and the United States for various pursuits.
By 1990, Kelpies have been trained as scent dogs with good success rates. In Sweden they are widely used for tracking and rescue work.