As one of the largest bays in the Aegean, the Italians saw its potential as a naval base to expand their military presence in the eastern Mediterranean.

In the 1920s and 30s, an entire town was built from scratch by the architects Armando Bernabiti and Rodolfo Petracco.

The resulting town was named Portolago, allegedly after Mario Lago, the Governor of the Italian colony from 1922 to 1936, although some sources say the Italians had already named the bay Portolago due to its resemblance to a lake and the arrival of a Governor called Lago was purely a coincidence.

Etymologically the toponym is in fact derived from the word Ancient Greek λάκκος (lắkkos) which meant generally "a pond"[2] evidently referring to the natural shape of the harbour, from which derived the ancient Λακκίον (Lakkíon) and, after the apocope, the nowadays Greek toponym, already anchored semantically at the same meaning.

"[3] The buildings include:[3] Portolago was built up as the main base of the Italian Royal Navy in the Dodecanese starting in 1923, as the harbor of Rhodes was too small.