As with many other things that are Alaskan -- it all started with gold!
There was a river named "Haidilatna" by the Athabascans. The name Iditarod stems from this native word. In the early 1900's, gold was discovered in Otter Creek, a branch of that river, and soon afterwards a town was built there, taking on the name of Iditarod.
When the gold ran out a couple decades later, people left the town and only a trace of it remains. Once the great sled dog race was created, it was named after that bustling mining town which, now a ghost town, is one of the checkpoints (southern route) of the trail and marks the 1/2 way point of the race.