Masala dosa is a South Indian dish which originates in Udupi--said to come from the Temple Streets of Udupi, Karnataka. A dosa is a crepe made from a batter of fermented rice and lentils. Masala dosa is a dosa filled with potatoes, onions and spices (potato and onion curry).
Originally dosa was eaten with potatoes on the side, but due to a potatoes shortage, onions were added to smashed potatoes and then wrapped in the dosa to hide the onions (some Hindus and Jains did not eat onions)--and that's how Masala dosa was invented.
Another type of Masala dosa, called the Mysore Masala dosa, is served with red chutney. The Mysore Masala dosa originated in Mysore (a large city in Karnataka) and according to NationMaster, was created when "The King of Mysore hosted a big festival, after the festival there was a lot of food left over, he ordered his cook to think of somethig to make, so nothing is wasted. The cook came up with the brilliant idea of stuffing a plain Dosa with potatoes and spices."

http://www.youtube.com/watch?v=jSqLteO1OK4

http://www.youtube.com/watch?v=V_DpjDc7PQI&feature=related

See the sources below for more info.
Source(s):
http://en.wikipedia.org/wiki/Dosa#Masala_dosa
http://www.nationmaster.com/encyclopedia/Dosa
http://masalamagic.blogspot.com/2006/06/story-of-dosa.html
http://www.hindu.com/thehindu/mp/2003/06/16/stories/2003061601810400.htm

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