L'histoire ... qu'est-ce que c'est ?

Ask any person the above question, and most probably you'll get the answer that 'histoire' has dual meaning in french : history and story. And therefore the semantics of the word are context dependent. The Italian word 'storia' means the same thing. Both these words are derived from 'historia' of the parent language, latin. Ergo, there has been a whole linguistic tradition of signifying some degree of similarity between the 2 concepts. I don't know whether it was done intentionally or not, but if you actually ponder upon the various aspects of histories and stories, some interesting things are observed.
I myself started thinking about it yesterday, when I finished Macbeth and was reading the history related to the play. The play is made up of characters and events from the Irish folklore. And by what I read, it seems that Shakespeare improvised heavily on the original story. First off, the main characters of the play were real people. But according to the old (and so the more reliable) version of events :

1. Duncan was something of a milk-baby, heavily dependent on Macbeth and Banquo ; as opposed to the wise, venerable and sagacious ruler of the play.
2. Banquo was privy to the murder plan of Duncan, but didn't interfere for his own selfish ends ; as opposed to the epitome of nobility in the play.
3. Macbeth was a wise and just ruler ; as opposed to the neurotic tyrant of the play.

And the reason for these heavy improvisations ? Well, the play was written to be played in front of King James I, who was supposedly the descendent of Banquo. So obviously Banquo had to be painted as a hero and consequently, Macbeth as a villain. And I can't really blame Shakespeare for taking liberties with history like this. Firstly, the play was really good. Secondly, he never claimed it to be 'real' history. Thirdly, I understand his position. You see, the genealogy and history of my own family has been recorded for many generations by a people called 'Bhat' or 'Charana'. They are traditional folk poets. They are called at weddings (rarely these days), to sing the family history and update their catalogues. Now, if they want to get paid( and they are indeed paid very well at such occasions), then they would obviously 'smooth over' any unsavoury details. I mean, you wouldn't want your wife to know at the altar that your great grandfather was a serial killer or something like that.
As I said, at least Shakespeare never claimed his play to be actual history. But people have been playing ball with history since the dawn of civilization itself. The history of ancient India was messed up so hopelessly by imperialist(British) scholars, that every now and then I get to read something about the newly discovered inconsistencies in it. And we're still studying their version in schools, mostly. Similarly there was the news of a madarsa in Hyderabad where the history books portrayed Aurangzeb to be some kind of a tolerant, benevolent hero; while in the official and popular texts, he's supposed to be the worst of the mughal lot. Worse; at least Aurangzeb has been dead for more than a couple of centuries now; but a few years ago I read about schoolchildren in the government schools of Bihar reading about Laloo Prasad Yadava as a part of their curriculum. Of course, he's made out to be the greatest hero there ever was. He's actually compared to Lord Krishna in these texts !
The problem, stated in the most general terms I can think of, is that every piece of recorded history was catalogued by some person/group of persons, who had to do it under certain constraints : bound by either external obligations or their own subjective point of view. So, the account is bound to be incomplete and imperfect. Some aspect, some perspective, some data is almost always left out; and sometimes, some fabricated data is added.
This addition of fabricated data is most obvious in legend and folklore, and by the very definition of legend and lore, excusable. But it has to be subtle and insidious in texts professing to be serious historical texts. So, how far should I trust these texts, and exactly how much does it actually affect my life in any serious way? I'm quite sure there must be some parameters to judge the authenticity and worth of a historical text.
I haven't reached any resolution to the problem yet. I discussed it with one of my professors, assuming(correctly), that this problem must have been researched on. She gave me some food for thought, the name of a book ("What is history" by E.H. Carr), and a proposition to do a term paper related to the problem. I'm not sure about the term paper yet, but I will keep looking for answers, and keep writing posts about every new development, until I arrive upon some conclusion.