Dinosaurs were probably first discovered by the Chinese, who at the time would have interpreted them as dragons. Due to this mistake in identity, the Chinese believed the fossils to hold great powers and would grind them up for medicinal reasons.
Ancient Romans and Greeks would used dinosaur fossils as the basis for many of their legendary monsters, and even Gods. In early England fossil finds started great tales of dragons.
The first well documented find of a Dinosaur bone, in the 1670's, was not recognized as such. Sadly through ignorance brought about by the Christian Church (who did not believe the Earth had been in existence for more than a few thousand years), the first dinosaur bone was accredited to having belonged to a giant human, one killed during the biblical flood. Later (after other discoveries listed below), through artists rendering it has been determined that the bone was a thigh bone from a dinosaur, and was categorized as belonging to the meat eater, Megalosaurus. The original bone became the butt of ridicule after a drawing made it look like an over-sized penis, and has disappeared.
It was almost 150 years later that Dinosaurs were described somewhat more accurately, knowledge was sought after, and information was cared for.
The biggest error in dinosaur interpretation occurred in 1822. A set of teeth were discovered, either by Gideon Mantell or his wife, Mary Ann. This was one of the first dinosaurs ever discovered that was recognized as something important.
In 1834 more fossils were discovered in Maidstone, Kent, these were of the same species and were used in the process of understanding what the animal looked like.
However, the mistake took place in interpreting the build of the creature and reassembling it. Because the teeth looked a little like massive Iguana teeth, not only was it given the name Iguanodon, but its remains were assembled so it looked more or less like a giant lizard. Nobody at that time could believe anything other than the creature being a slow quadruped (not unlike an elephant), and had no idea they were millions of years old, rather than thousands. It was assumed to be an animal killed in the great flood according to Biblical legend. Igualodon was placed on four legs, given a broad head and a rather lumbering appearance. Most humiliating of all, its thumb was placed on the tip of its nose so as to be some sort of cute horn.
We now realize Iguanodon to have stood on two legs, to be able to move rather quickly, and the nose horn was actually a thumb bone. We are still learning more about the dinosaurs and old mistakes are still being corrected.