According to one, early Christian settlers from Palayoor (near Chavakad in today's Thrissur district), who settled down in Meenachil on the other side of the Meenachil River, named the place as Pala - a shortened form of Palayoor.
Another view is that the name was derived from Palathu families, the prominent early settlers of the region.
Later they were defeated by the Travancore army of Dharma Raja (successor of Marthanda Varma) and their kingdom was annexed to Travancore (the ruling king committed suicide). The family had a successor only after a very long gap due to this genocide by the Travancore forces.
All their male folks including boys were slaughtered. Early settlements in the region date back to 1000 AD.
The reason why palai city is famous is because of the St Thomas temple in Edamattom which contains the true cross or Cross of Jesus Christ or Holy cross.