Buddha's Nagas

According to the Vinaya or Buddhist Monastic Rule, an animal cannot become a monk.   At one time, a Naga was so desirous of entering the Order that he assumed human form in order to be ordained.

" Shortly after, when asleep in his hut, the naga returned to the shape of a huge snake. The monk who shared the hut was somewhat alarmed when he woke up to see a great snake sleeping next to him! The Lord Buddha summoned the naga and told him he may not remain as a monk, at which the utterly disconsolate snake began to weep. The snake was given the Five Precepts as the means to attaining a human existence in his next life when he can then be a monk. Then out of compassion for the sad snake, the Lord Buddha said that from then on all candidates for the monkhood be called 'Naga' as a consolation. They are still called 'Naga' to this day." 

      ~ About Ordination.  

Naga Sadhus

There are ten akharas or "arenas" of the Hindu sadhus known as nagas of which seven are Shaiva or Shivite.  Halfway through an article at Rediff.com, there is a link to origins but their earliest history is not revealed.

A speculation: In one version of the Buddha's life, he is said to have passed the night at the hermitage of Uruvela where the leader, Kashyapa, welcomed him but warned that the only vacant hut was the haunt of a malevolent naga.  This did not deter the Buddha, but as soon as he went into a hut to pass the night, witnesses said a terrific struggle ensued. It culminated in the dwelling's erupting in flames, and the bystanders had to rush with jars of water to put it out.

No one dared enter the hut, though, and when morning came Kashyapa and his followers thought that the young visitor must have been fiercely burned by the serpentís fire.  They did not know that the powers of the Buddha had overcome those of the naga's fury, and he had calmly placed the serpent in his begging bowl.  When the Buddha emerged from the hut, he presented the distressed yogis with the serpent coiled peacefully inside his alms bowl. 

Potala or Patala

The former palace of the Dalai lamas in Lhasa, Tibet is known as the Potala.  The name means  'heavenly abode.'  In the great Indian epic, Mahabharata, the Nagas inhabit the realm called Patala.  Ulupi,  daughter of their king, married Arjuna the hero and leader of the Pandava brothers whose charioteer is Krishna. The Nagas fought on the side of the Ashuras [anti-gods or titans] in the Great War.

In the western borderland of Pakistan that is the Udyana of legend, a version of the story has consequences for farmers. The champion, Apulala [cf. Apsu of Mesopotamia] of the nagas in Patala, a watery region under the earth, are generally able to keep the wicked dragons [cf. Tiamat of Mesopotamia]  from overdoing the seasonal rains.  Thanks to his moderating capabilities, the farmers prospered.  

In gratitude each family offered him a bit of grain as tribute. After some time several of the inhabitants of the place began to forego the yearly offering. The Naga became angry and prayed that he might become a poisonous dragon so that he could drench the countryside in rain and wind. So it is that at the end of his life he became the dragon of that country. To this day Rajas (local princes) in the Hindu Kush are said to be able to control the elements ... .  http://sorrel.humboldt.edu/~geog309i/ideas/dragons/naga.html

In Tibetan Buddhism, these water nagas are keepers of secret books of wisdom.  They can be generous, but also have the ability to let loose diseases and epidemics.  They are propitiated with suitable offerings.