Wondered often about this one myself. There is this info:

According to Dylan, the beautiful melody line of this song came from Paul Clayton. "Paul was just an incredible songwriter and singer," said Dylan in 1985. "He must have known a thousand songs. I learned 'Pay Day at Coal Creek' and a bunch of other songs from him. We played on the same circuit and I traveled with him part of the time. When you're listening to songs night after night, some of them rub off on you. 'Don't Think Twice' was a riff that Paul had. [See above.] And so was 'Percy's Song.' Something I might have written might have been a take off on 'Hiram Hubbard,' a civil war song he used to sing, but I don't know. A song like that would come to me because people were talking about the incident. A lot of folk songs are written from a character's point of view. 'House of the Rising Sun' is actually from a woman's point of view. A lot of Irish ballads would be the same thing. A song like Percy's Song, you'd just assume another character's point of view. I did a few like that."

As for the words, Dylan has clearly borrowed the structure from "The Wind and the Rain" (also known as "Two Sisters"), though the stories in the two songs are unrelated. The first verses of the two songs share a similar refrain:

Two loving sisters was a-walking side by side, Oh the wind and rain. One pushed the other off in the waters, waters deep. And she cried, "The dreadful wind and rain." (The Wind and the Rain)

Bad news, bad news come to me where I sleep, Turn, turn, turn again. Sayin' one of your friends is in trouble deep, Turn, turn to the rain and the wind. (Percy's Song)... while the final verses are even more closely related:

The only tune that my fiddle would play, Was, "Oh, the wind and the rain." The only tune that my fiddle would play, was Was, "The dreadful wind and rain." (The Wind and the Rain)

And I played my guitar through the night to the day, Turn, turn, turn again. And the only tune my guitar could play Was, "Oh the cruel rain and the wind." (Percy's Song)

That comes from THIS WEBSITE. Like you Guest, outside of it's relationship to two Trad songs, I can't find much regarding the lyrical history.

Spaw