It was first built in 1049 during the Ly Dynasty, on the west side of the ancient capital of Thang Long. Its original name was Dien Huu, expressing a wish for longevity of the second Ly emperor. The pagoda has the shape of a lotus blooming on its stem. Legends said that King Ly Thai To was old but had no son.

One night, in a dream the king saw the goddess of Mercy sitting on a lotus flower offering him a male child. Shortly after that the queen got pregnant and she gave birth to a son. The king thanked the goddess by ordering the construction of this pagoda in the form of a lotus and named it Dien Huu, meaning long lasting happiness and good luck.