Il ne fallait pas
In this phrase "il ne fallait pas y preter attention" supposedly the English translation is "you do not need to worry about it"
First question. Wordreference.com tranlates "il ne fallait pas" to You shouldn't have done that or you shouldn't have, but isn't il, he or it, not you?
Second question. The original phrase sounds like its alleviating someones worry and in the wordreference.com translation it sounds like a scolding, does that make sense? There opposite meanings are they not?
Third question. From what I've understood a "y" is to direct an action somewhere, namely "there", but there is no "there" here, so what role does y play?
(1). The verb "falloir" is always a tricky verb for learners. Remember that it refers to a general need, meaning it applies to everyone involved. It is only conjugated in the third person.
In the present tense it is "il faut," which is usually interpreted as "it is necessary to." The "il" does not refer to any particular person. This means "il" is not he, but rather an impersonal pronoun. Think of when we say "it is raining." The "it" doesn't refer to anything, hence an impersonal pronoun.
In English, we would also usually use the royal "we" or the general "you" to translate "il faut." In the past tense, it can be conjugated as "il fallait" or "it was necessary to."
- Il faut = You must (general you) = It is necessary to
- Il fallait = You had to = It was necessary to
- Il ne fallait pas = You did not have to = It was not necessary to
(2). The wordreference translation (that you may be referencing) is for the stand-alone expression "Il ne fallait pas !" It doesn't really apply to your sentence above. You can use this expression to say "you shouldn't have done that!" to reproach somebody for doing something wrong, or as a polite response to an unexpected gift or favor, as in "You didn't have to do that for me" or "Aw, shucks, you shouldn't have."
(3). To add to what Jarvis755634 said, "y" in this sentence is used as a pronoun. The full verb using it is "prêter attention à [qch]," with the [qch] standing for "quelque chose." In English, the verb means "to pay attention to [something (st)]" or "to keep [st] in mind." The [qch] or [st] is the object of the verb "prêter attention."
The pronoun "y" is used to replace the "à [qch]" of a verb, to avoid repetition of the object. Thus, "prêter attention à [qch]" turns into "y prêter attention."
Of course we can also use that verb with a person, as in "prêter attention à [quelqu'un (qqn)]." But be careful, because we don't replace "à [qqn]" with "y," instead, you can use the tonic pronouns (moi, toi, lui, etc.). For example, "pay attention to me" would be "prêter attention à moi."
The verb "falloir" always conjugate with "il" and his meaning is always "it".
The signification of "il faut" is similar to English like "it need to" : you should see this MarcD50 explains very well : https://www.duolingo.com/comment/23088498.
"y" can be an adverb or a pronoun. When "y" is a adverb, it refers to a known place or a moment like "il y a trois maisons (dans ce lieu)" or "il y a trois ans (que cela s'est produit)". When "y" is a pronoun, it refers to an object or a person, supposedly known, instead of using an object complement.
Direct versus indirect objects!
To refer to a direct object, hopefully you're already familiar with using 'le', 'la' and 'les' -- "Je veux le voir" - "Je veux la manger" - "Je veux les acheter." (this is just for things, there are other words for talking about people).
OK, so when you have an object that would have taken the preposition 'à', you get to use 'y' - You already mentioned this commonly refers to places - "Je veux y aller", but in your example the verb is 'prêter attention à qch', so "il faut y prêter attention". "You have to pay attention to it".
Also, when you have an object (again not a person, only a thing) that would have taken the preposition 'de', you use 'en' - e.g. from the verb "avoir besoin de qch", you can say "J'en ai besoin" meaning "I need it". "Vous en avez combien?" (How many of them do you have?) "J'en ai beaucoup" (I've got lots of them)
"il ne fallait pas y preter attention" -- "you should ignore it"
(1) The verb falloir is said impersonnel. It's a bit like to rain when you say it rains today. It's a verb, true, but you can't say You rain, My sister rained... or something like that. Its meaning is general, falloir = to be the right thing to do. So Il ne fallait pas y preter attention ≃ It wasn't the right thing to do to pay it attention.
(2) The sentence actually sounds like a scolding to me (French-native). But it can also mean You didn't need to worry about it because as falloir = to be the right thing to do, when it's negate it doesn't mean it's the wrong thing to do, but it's not the right thing to do (I don't know if you understood). Basically, it means that it's not necessary, but not wrong either, so yeah, it sounds as both a scolding and an alleviation.
(3) y doesn't refer to a place automatically. Generally, it refers to something abstract (like a situation, a context, an action, a place) that is introduced with the preposition à. Basically prêter attention [à quelque chose] = to pay attention [to something]. When this something is an object or a person, you would use lui/leur (Il ne faut pas lui/leur prêter attention = You didn't need to worry about him/her/it/them). Here, you use y because you don't refer to an object (like a table, a computer...), but to a situation or an action.