Prior to the arrival of Europeans the area was occupied by the Thagungwurung Aborigines. The party of explorer Thomas Mitchell crossed the river at or near the future townsite in 1836. He named it the 'Campaspe' after one of Alexander the Great's courtesans.
The first squatter, C.H. Ebden arrived in 1837, establishing the 'Karlsruhe' station (hence the town of Carlsruhe just to the south of Kyneton). Other squatters followed. Some took the unusual step of adding corn-growing to the usual pastoralist's repertoire of sheep and cattle and a corn mill was in operation by 1841. Although there weren't many Kooris in the district, two shepherds were killed during a confrontation in 1842. The mounted police pursued the party in question, killing six of their number.
The future Kyneton was surveyed in 1846 as a camping place for teamsters headed to Bendigo. It was chosen as a townsite in 1848 and surveyed the following year to serve as a centre of law and administration in place of the earlier Carlsruhe settlement to the immediate south. At that time there were a few slab buildings and a couple of huts. It was named after the English village of Kineton (now Kington).
In the early 1850s Kyneton developed rapidly as a gateway to and supply centre of the goldfields of Clunes, Castlemaine and Bendigo. It was a major coach stop and the bellies of the goldminers (and those of Melburnians) caused a rapid expansion of local agricultural production. Kyneton became the state's major agricultural town and the general prosperity and development resulted in a building boom which saw bluestone quarrying become a substantial industry. The regular through-traffic also allowed a diversity of businesses and services to develop. Kyneton was proclaimed a municipality as early as 1857.
Gold was discovered in its own right at Lauriston in the late 1850s and furnished reasonable returns into the 1870s. The rail link from Melbourne arrived in 1862, further boosting the fortunes of the town. In the 1890s the state's first pasteurizing plant was introduced at Kyneton.
In 1858 Caroline Chisholm lived at Kyneton where her family owned a store and her husband was a magistrate. While she lived here she began to establish a series of inexpensive overnight shelters for travellers on the Mt Alexander Rd (now the Calder Highway), a road which was commonly used by prospectors heading to the central goldfields. A reminder of this scheme can still be seen at Carlsruhe
In 1860 the ill-fated Burke and Wills expedition camped just to the north of the township and the only survivor, John King was regaled at a local hotel on his return trip. On the literary front, early Australian novelist, Joseph Furphy, lived at Kyneton as a teenager