The existence of the Lord as 'Panakala Narasimha Swami' has an interesting tale behind it. The legend says that Namuchi, a Raakshasa (demon), after great penance, obtained a boon from Brahma that he should not be killed by any thing that is either wet or dry. After the demon was granted the boon, he began to harass Indra and other Devathas. Lord Indra, with the help of Lord Vishnu, commenced destroying the army of Raakshasa Namuchi who hid in a cave in Sukshmaakaaram giving up his sthulaakaaram (Physical manifestation). Indra dipped Sudarshana Chakra (the disc weapon of Lord Vishnu) in the ocean and sent it into the cave. Lord Vishnu manifesting Himself at the centre of the disc killed the demon with fire of His exhalation. He thus got the name of Sudarsana Narasimha.
The blood that flowed from the body of the demon seemed to have formed into a pool at the foot of the hill. The Devathas themselves were unable to withstand the fire of the anger of the Lord Vishnu and they prayed for Him to calm down. In kruthayugam, the Lord took 'Amrutam' (nectar) and cooled down. The Lord said that he would be satisfied with milk in Dwaparayugam, with ghee in Threthayugam and with paanakam (Jaggery water) in Kaliyugam. Hence the Lord in Kaliyugam is called as Paanakala Lakshmi Narasimha Swami.
In Krithayuga, Vaikhanasa Maharshi worshipped Lord Narasimha and whose idol is worshipped in the temple (up hill) even today.