The use this sort of phrase is widespread in Europe - and elsewhere - for the way to begin a folktale, the traditional "novel" of the folk. This wiki page is useful in the way it provides numerous common introductions for various cultures, most of which can be boiled down, in English, to "Once upon a time..." It is interesting as well to note that the page indicates that some sort of this has been around since the 14th century in English, but I am not prepared to evaluate this assertion. The page is wrong when it links this to literature for children. That is simply not the case, and it is a serious error in the page.

The point of introducing a folktale in this way was to let the audience to know that the story that follows was not to believed, and that it took place in some remote fantastic time. This was in direct contrast with legends, which were told in an immediate fashion to be believed: "My cousin in the next valley saw a ghost..." And legends were short while folktales were long.

The following is from an Introduction to Folklore that I am assembling and hope to have online in 2014. This may be helpful (and ask if you have additional questions):

European folklorists, following the lead of the folk themselves, have long recognized two forms of oral tradition, Sagen and Märchen, legends and folktales. While there are many other forms of oral tradition, legends and folktales stand in opposition to one another, yet share a great deal.

Legends – or Sagen as the profession often prefers – are short, single-episodic stories told chiefly in the daytime, and the teller intended the listener to believe the story. Sagen often have horrible ending, meant to underscore the story’s important message. A large number of them are, after all, typically meant to be instructive, to serve as warnings in some way. Legends are not necessarily long lived. Their point is to reinforce and prove the legitimacy of a particular belief. Nonetheless, some Sagen take on a traditional character and migrate over considerable spans of time and space.

Folktales – or Märchen. Again using the German, technical term – are longer stories with more than one episode. They are restricted, in theory at least, to evening presentation. A folktale is not to be believed, taking place in a fantastic setting. A folktale also requires a happy ending, the cliché of “happily ever after.” Any given folktale can be told with considerable variation, but they are traditional in basic form, and European folklorists have spent decades tracing the history and distribution of these stories.

A word here about the term “fairytale” is appropriate. At the end of the eighteenth century, various writers, most prominently the Grimm brothers, began publishing children’s stories based on Märchen. These collections became extremely popular, particularly among the urban and increasingly literate emerging middle class as it found itself removed from the peasant soil that served as home to the stories. Fairytales often cause misunderstandings. In a culture that knows more about fairytales than Märchen, people assume that the folktale was intended for children. This is certainly not the case since the stories were often violent or sexual in ways thought inappropriate for children. Indeed, the telling of Märchen was usually delayed until the children had gone to bed. While fairytales provide the modern reader with the easiest access to the many stories that were once told internationally, one should always realize that they are a step removed from the primary inspiration. The original stories and their content provided serious entertainment for adults.

The evolution of fairytales had a profound effect on the subject of fairies, elves, and trolls. Because fairytales became the literary domain of children, many people – including writers and publishers – assumed that the same was true of the supernatural beings. In the original context of these supernatural entities, nothing could be further from the truth. These were not cute diminutive creatures whose sole purpose was to delight children. They were powerful, dangerous, and capable of great harm. The European peasantry feared and respected them, and their stories underscore this, conveying in uncompromising terms the code of ethics and behavior that one must employ to survive an encounter with that dangerous world of magic.