Ghastly originates from the Middle English word gastli, which means "inspiring terror" or "hideous".  It is formed from the verb gast (to frighten or terrify) combined with the suffix -ly (denoting "like").  The spelling was originally gastli.  The "gh" was added in the 16th century due to a conflation and confusion with the word ghost (which is why the words share such similar imagery and spelling).  It shares the same root as the word aghast.  

The earliest recorded use of the adjective ghastly in English, according to the Oxford English Dictionary, dates to around 1305 in a Middle English text known as St. Christopher.  The adverb was used later, in 1589, used by the Elizabethan poet Richard Robinson in his writings, as recorded in the OED.  

The adjective form of "aghast" was first recorded in the Middle English Period (1150-1500).  The earliest known citation in their records dates to around 1300 in the text Holy Cross.  The word emerged as a past participle of the now-obsolete Middle English verb agasten (meaning "to frighten" or "to terrify"). This verb was eventually formed by combining the intensive prefix a- with Old English gæstan (to terrify), which shares roots with the word "ghost".  Interestingly, while the adjective appeared around 1300, the OED notes the verb form of aghast wasn't documented until much later, during the 1870s.