[I did not manage] to find it (using a variety of spellings) in any encyclopedia or atlas. If there is (or was) such a place does anyone know anything about it?
Well, I don't know of such a town. I assume it is just a perversion of "Canada." Such a far-away, mysterious place, that it might have been unclear whether it was a country or a town.
It's probably been mentioned here before, but anyway. . .Canadee-I-O was recorded by the British singer Nic Jones on his album Penguin Eggs, and Dylan's version is very similar to Jones'.