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The region was already inhabited in Mesolithic times, as revealed by rock paintings and Middle Stone Age artifacts in the cave of Porc-Épic and Laga-Oda only a few kilometers from Dire Dawa. The area surrounding Dire Dawa is believed to have been a settlement of the extinct Harla people. Historically, the area used to be part of Adal Sultanate during the medieval times and was exclusively settled by the Gurgure Dir clan which is a major Somali tribe and after the weakening of Adal Sultanate, the Oromos took advantage and were able to penetrate through the city and settle into these areas and also assimilate some of the local Gurgura clan. Dire Dawa was considered the domain of the Emirate of Harar until Meneliks conquest of the kingdom in 1887 and consequently became incorporated into modern Ethiopia from thereon.
The present-day town of Dire Dawa (311 km by rail from Djibouti), however, is of very recent origin. It owes its foundation to a technical problem: when it became impossible to lay the Addis Ababa-Djibouti Railway via Harar because of the steep access to the town, Atse Menelik II accepted (in a later dated 5 November 1896) that the first part of the line might finish at a village at the foot of the mountains, which should be named Addis Harar ("New Harrar").The railway reached this location on 24 December 1902, a date which may be considered the day of Dire Dawas foundation. The new name, however, did not win recognition.Currently, there are plans to revitalize the city. A historic and popular part of the city is to be demolished and replaced by a financial center, malls, mixed-use buildings, hotels, recreational facilities, and hospitals. As part of the plan, historical buildings will be renovated, and a new space will be allotted for building new homes and businesses for those displaced by the move. New roads, parks, and an industrial zone will also be built, and major railway project is expected to greatly increase business activity in the city.