It is a well known fact that the Aztecs, one of Mexico's most renown civilizations, fermented agave and drank the resulting juice which was known as pulque since about 200 A.D. So important was this drink to their civilization that they even had a god of pulque: Patecatl - which they worshiped.
After the Spaniards arrived in Mexico in the 1500's and discovering the aztec drink, they began to slowly develop a spirit from agave which they called mezcal wine with the purpose of counteracting the deficit in brandy supply from Spain. This spirit evolved to become the tequila that we know and love today.
In 1600 the Marquis of Altamira Don Pedro Sanchez de Tagle founded the first official tequila distillery in Tequila, a town in the highlands of the State of Jalisco around which most of the agave plantations and distilleries were established. It was therefore only appropriate that the spirit be named after said town.