http://news.medill.northwestern.edu/chicago/news.aspx?id=90119

The myth of the Cyclops may have been fueled by fossil discoveries,
like this dwarf elephant skull on display at the Field Museum’s
Mythical Creatures exhibit through Sept.1. Ancient Greeks who uncovered
the skulls of dwarf elephants on Mediterranean islands may have
mistaken the central nasal cavity—where the trunk was attached—for a
single eye socket, which suggested one-eyed giants once roamed the land.

The skull of a woolly rhinoceros (Coelodonta antiquitatis) on
display at the Field Museum’s Mythical Creatures exhibit through Sept.
1 was once kept in the town hall of Klagenfurt, Austria.  It was said
to be the remains of a dragon slain before the city was founded around
AD 1250. Many cultures based their myths of dragons on wooly
rhinoceroses or dinosaur bones.

Sailors from the age of exploration saw those squids too, and didn’t know what they were. Thus the Kraken was born.

“Scientific research [and] technology advances enable us to study
underwater life and discover giant squids and explain the Kraken
probably was a giant squid,” said Chapurukha Kusimba, a curator of
anthropology who worked on the creatures of the water part of the
exhibit.

The griffin, a half-eagle, half-lion regal creature, is a
mythical beast close to Mayor’s heart; it took her 15 years to figure
out that the myth of the griffin was based on unearthed protoceratops
bones. The protoceratops was a four-legged, beaked dinosaur with a bony,
crowned skull. That bony tiara was very thin and eroded away, leaving
what looked like a wing.

“Based on an artifact, scientists can look back at the myth and explain how the myth arose,” Kusimba said. The bigger mystery is not what these legends are, but how they came about.