The name Avalokiteśvara is made of the following parts: the verbal prefix ava, which means "down"; lokita, a past participle of the verb lok ("to notice, behold, observe"), here used in an active sense (an occasional irregularity of Sanskrit grammar); and finally īśvara, "lord", "ruler", "sovereign" or "master". In accordance with the rules of sound combination, iśvara becomes eśvara. Combined, the parts mean "lord who gazes down (the world)". The word loka ("world") is absent from the name, but is implied. Lokeśvara-rāja 'King of world sovereignty' is another epithet of Avalokiteśvara. The Chinese interpretation implies 'freedom through sovereignty' comes to mean 'liberation through enlightenment' in Buddhist sense.

But according to recent research, the original form and meaning of the name was quite different. It was Avalokitasvara with the ending -svara ("sound, noise"), which means "sound perceiver" (i.e. perceiver of the cries of the sentient beings who need his help). This is the exact equivalent of the Chinese translation Guan Yin. This name was later supplanted by the form containing the ending -īśvara, which does not occur in Sanskrit before the seventh century. The original form Avalokitasvara already appears in Sanskrit fragments of the fifth century.

The original meaning of the name fits the Buddhist understanding of the role of a bodhisattva. The reinterpretation presenting him as an īśvara shows a strong influence of Shaivism, as the term īśvara was usually connected to the Hindu notion of a creator god and ruler of the world. Attributes of such a god were transmitted to the bodhisattva, but the mainstream of the Avalokiteśvara worshippers upheld the Buddhist rejection of the doctrine of a primordial creator god.

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