Also known as Kethapayya Narayan Temple, this temple is adjacent to the majestic statue of Lord Shiva. Many pilgrims flock to the temple to get the blessings from the god of dreadlocks. Though the temple disallows people to enter the sanctum, it is believed that the original piece of the Atma-Linga is installed 2 feet underground in the sanctum. There is also Shaneshwar Temple constructed in the same complex.

Legend has it that Raavan wanted to attain immortality and he worshipped Lord Shiva to receive the Atma-Linga (also referred to as the soul of Shiva). Lord Shiva was pleased by his dedication and rewarded him the Atma-Linga. However, other gods feared the consequences of this, so Lord Ganesha was requested to stop Raavan from taking the Linga back to Lanka (presently known as Sri Lanka). Lord Ganesha was well aware that Raavan was a devoted and religious person, so he used this trait effectively to obtain the Atma-Linga back from Raavan. While Raavan was about to perform his evening prayer (sandhya-vandanam), Lord Ganesh appeared in the form of a shepherd boy and agreed to take care of the Linga. Raavan returned late after performing the rituals, so Ganesh called out for him three times and then left the Linga on the ground, which firmly got installed at that location. Raavan, knowing that he has been tricked, tried to apply all the force to uproot the Linga from the ground. All that immense force broke the Atma-Linga into pieces and it is known that one of the pieces fell at Kanduka Giri, which is where the present-day main temple of Murudeshwar is built.

Apart from the main temple, the tall statue is an attraction in its own. This statue is the second tallest Shiva statue in the world and can be spotted from a distance (the tallest statue is in Nepal at the Kailashnath Mahadev). The best view of the statue is from the beach or the Rajagopuram. Artisans took two years to complete the statue, towering over 123 feet. Underneath the large statue is a man-made cave that features figurines and statues that narrate the stories of Raavan and his efforts in getting the Atma-Linga. The audio guide is narrated in Kannada but one can easily understand the story by looking at the expressions of the figurines. There is a nominal fee of INR 10 per adult to enter the cave.