"Originally the rosary had 150 beads, the same number of psalms in the Bible. In the twelfth century, religious orders recited together the 150 Psalms as a way to mark the hours of the day and the days of the week. Those people who didn’t know how to read wanted to share in this practice, so praying on a string of 150 beads or knots began as a parallel to praying the psalms. It was a way that the illiterate could remember the Lord and his mother throughout the day. The “Divine Office”; the official prayer of the church; is the recitation of the psalms over a four week period, and is still prayed today.
This first rosary was prayed as we do today, a person would pass their fingers over each bead and say a prayer, usually the “Our Father”. The “Hail Mary” as we know it wasn’t even around at that time.
The Hail Mary owes its origin to the rosary. When people said the rosary in the twelfth century, Gabrielle’s greeting “Hail Mary, full or grace, the Lord is with thee” was often said along with the Our Father. Later, Elizabeth’s greeting ”blessed are you among women” was added. It was not until the sixteenth century that the words “Holy Mary., Mother of God, pray for us sinners now and at the hour of our death” were added.
Various people have added other things to the rosary over the centuries. In the fifteenth century, a Carthusian monk divided the rosary into fifteen brackets (or decades) and a Dominican assigned mysteries to each of the decades."
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At an early date among the monastic orders the practice of counting prayers established itself not only of offering Masses, but of saying vocal prayers as a suffrage for their deceased brethren. For this purpose the private recitation of the 150 psalms, or of 50 psalms, the third part, was constantly enjoined. Already in A.D. 800 we learn from the compact between St. Gall and Reichenau (“Mon. Germ. Hist.: Confrat.” Piper, 140) that for each deceased brother all the priests should say one Mass and also fifty psalms.
“Ancient Customs of Cluny”, collected by Udalrio in 1096, that when the death of any brother at a distance was announced, every priest was to offer Mass, and every non-priest was either to say fifty psalms or to repeat fifty times the Paternoster (The Lord’s Prayer).
To count these accurately there is every reason to believe that already in the eleventh and twelfth centuries a practice had come in of using pebbles, berries, or discs of bone threaded on a string. It is in any case certain that the Countess Godiva of Coventry (c 1075) left by will to the statue of Our Lady in a certain monastery “the circlet of precious stones which she had threaded on a cord in order that by fingering them one after another she might count her prayers exactly” (Malmesbury, “Gesta Pont.”, Rolls Series 311). Another example seems to occur in the case of St. Rosalia (A. D. 1160), in whose tomb similar strings of beads were discovered. Even more important is the fact that such strings of beads were known throughout the Middle Ages - and in some Continental tongues are known to his day - as “Paternosters” which are Our Fathers. The evidence for this is overwhelming and comes from every part of Europe.
In the times before St. Dominic we can see that the, Paternosters, (The Lord’s Prayer) was prayed, and we know from history that during St. Dominic’s time The Lord’s Prayer and Our Lady’s Psalter, (The Hail Mary) were prayed on pebbles, or a string of beads.
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OCE
It is usually suggested that the rosary began as a practice by the laity to imitate the monastic Office (Breviary or Liturgy of the Hours), by which monks prayed the 150 Psalms. The laity, many of whom could not read, substituted 50 or 150 Ave Marias for the Psalms. Sometimes a cord with counters on it was used to keep an accurate count.
EWTN
http://www.newadvent.org/cathen/13184b.htm