In written accounts, Egilsstaðir is first mentioned in the 15th century as a place for legislative assembly. The nearby river, Eyvindará, is mentioned in Saga of the Sons of Droplaug and Saga of the inhabitants of Fljótsdalur.
Urbanisation in Egilsstaðir can be traced to Jón Bergsson (1855–1923), a farmer, who laid the groundwork for increased commerce and services at the Egilsstaðir farm by erecting a large residential building there at the start of the 20th century. The house is still in use as a hotel. Jón bought the farm Egilsstaðr at the close of the 19th century because of its location, when he predicted „Crossroads will be here“, which proved prescient. Along with others, Jón Bergsson also took the initiative to establish a co-operative Kaupfélag Héraðsbúa (KHB) with headquarters there in 1909. In subsequent years, bridges were built over Lagarfljót river og Eyvindará river and a road made over Fagridalur to Reyðarfjörður. Later, the regional headquarters for mail and telephone services were located at Egilsstaðir.
In 1947 Egilsstaðir was incorporated as a town and a rural jurisdiction Egilsstaðahreppur, with neighboring jurisdictionsVallahreppur and Eiðahreppur contributing land to the new jurisdiction. The town soon grew and by 1980 the population exceeded 1000. In 1987, the status of the town was upgraded to (kaupstaður) and renamed Egilsstaðabær, or the city of Egilsstaðir. In early 2011, the number of inhabitants was 2.257 and had increased by 41 percent from the year 2001, when 1.600 were registered there.
On 7. june 1998 Egilsstaðabær was united with Vallahreppur, Skriðdalshreppur, Eiðahreppur and Hjaltastaðarhreppur under the name Austur-Hérað. Austur-Hérað then became Fljótsdalshérað in the year 2004
