The Dattatreya Temple stands at the east end of Tachapal Tol, a small square on the east side of Bhaktapur. It honors the composite deity Dattatreya, a personification of the Trimurti: Brahma, Vishnu, and Shiva. According to scholars Mary Slusser and Gautama V. Vajrācārya, the temple was originally founded as a sattal, a type of dharmasala or public rest house, sometime in the 15th century. It was functionally similar to the Kasthamandapa, an older site in Kathmandu. Both buildings share similar legends: that each was built from the wood of a single tree and that each was founded on the site of a former island within a small lake where a famous Indian jogi had died. These similar foundation narratives might indicate a desire by the rulers of Bhaktapur to "borrow" the mythology of the Kasthamandapa, thereby enhancing the prestige of Bhaktapur and their "rival" dharmasala.

The Dattatreya Temple was likely erected between 1428 and 1467, either by Yaksha Malla (r. 1428-1482) or possibly by his son Raya Malla (r. 1482-1519). It was originally intended as a rest house for Shiva ascetics. Later, probably during the reign of Vishva Malla (r. 1547-1560) or Jitamitra Malla (r. 1663-1696), the design was altered to transform the sattal into a temple for worshipping Dattatreya. This required several architectural changes that fully manifested over the course of four centuries.

In addition to its construction dates, other historical events are associated with the Dattatreya Temple. It is believed that in 1769, when King Prithivi Narayan Shah conquered both Kathmandu and Patan before Bhaktapur, the kings of those kingdoms, King Jaya Prakash Malla and Narsimha Malla, respectively, took shelter in this temple. However, there is no specific documentation confirming whether they hid in the Dattatreya Temple or in the Bhaktapur Palace Complex. Nonetheless, they were given shelter in Bhaktapur.

In front of the Dattatreya Temple stands a tall pillar topped with an idol of Garuda, the vehicle of Lord Vishnu, in a Namaste gesture toward the temple. The facial structure of the statue is unique and was initially thought to be intended to depict the monk Dev Narayana Giri.
Dattatreya is considered an avatar and the combined form of the three Hindu gods Brahma, Vishnu, and Shiva, collectively known as the Trimurti. He is also seen as a manifestation of Parabrahma, the supreme being, in texts such as the Bhagavata Purana, the Markandeya Purana, and the Brahmanda Purana, though stories about his birth and origin vary across texts. In the Nath tradition of Shaivism, Dattatreya is revered as the Adi-Guru (First Teacher) of the Adinath Sampradaya of the Nathas, the first "Lord of Yoga" with mastery of Tantra, though most traditions and scholars consider Adi Nath to be an epithet of Shiva. The young Dattatreya is celebrated in Hindu texts as one who achieved self-awareness without teachers by observing nature during his Sannyasi wanderings and considering these natural observations as his twenty-four teachers.
For example:

• The Earth: Steadfast in its duties and steady in its cycles, teaching forbearance and remaining undisturbed even while oppressed.
• The Wind: Passes through the world like Truth, unchanged and unattached, with the capacity to disturb as it swirls around material objects.
• The Sky: Teaches that the Self, like the sky, has no boundaries and is beyond the reach of material nature.
• Water: Serves all without pride and purifies those who bathe.
• Fire: Purifies what it consumes and its qualities are not sullied by contact with the material world.
• The Moon: Waxes and wanes but remains unchanged, just like the soul.
• The Sun: Reflected in a million puddles, each reflection seems different but it is the same Sun. Similarly, the spirit seems contained within different bodies but is the same in all.
• The Python: Eats whatever comes its way and is satisfied, teaching not to pursue worldly things but to limit desires and accept what life brings.

The Dattatreya Temple in Bhaktapur is not only an architectural marvel but also a profound symbol of the region's rich spiritual and cultural heritage. Its evolution from a simple dharmasala to a dedicated temple for Dattatreya reflects the dynamic history and the enduring devotion of the people of Bhaktapur. The temple's unique foundation stories and architectural parallels with other sacred sites underscore the interconnectedness of Hindu traditions and the deliberate efforts to enhance Bhaktapur’s prestige through revered mythology.