Originally named “Terminus” as it was temporarily the northernmost stop on the Utah and Northern Railway while it was under construction, in 1881, the community was renamed for Union Pacific Railroad President Sidney Dillon, who had directed the project of bringing the railroad through to Butte, Montana.

[6] The town's location was selected by the railroad in part because of its proximity to gold mines in the area.

Dillon served as a central location for transporting goods to nearby boomtowns such as Bannack, Argenta, Glen, and Virginia City.

In 1884, Dillon became an incorporated town and began building sidewalks and permanent dwellings for the residents.

The agriculturally rich Beaverhead Valley became an ideal location for sheep ranching, introduced in 1869.

[10] A circus elephant named Old Pitt was struck by lightning in 1943 and is buried at the Dillon fairgrounds.

[11] Captain Joel Rude of the Montana National Guard crashed his F-106 into a grain elevator and died during a Labor Day Parade on September 3, 1979.

A plaque in his honor is part of the Southwest Montana Veterans Memorial park in Dillon.

[13] According to the United States Census Bureau, the city has a total area of 1.76 square miles (4.56 km2), all land.

[14] In April 2010, Dillon was listed as one of "America's Prettiest Towns" by Forbes magazine.

KDBM AM 1490 and KBEV-FM 98.3, owned by the Dead-Air Broadcasting Company, are both licensed to serve the Dillon area.

Since 2000 the high school football team has played in 11 Class A State Championships, winning eight.

[26] Recreational activities that draw tourism to Dillon include fishing on the Beaverhead River, snowmobiling, hiking, shopping at the Patagonia outlet, four-wheeling, the annual Demolition Derby, and skiing at Maverick Mountain Ski Area.

Dillon is also home to the annual "Montana's Biggest Weekend" event, also known as the Jaycee Labor Day Rodeo, Concert, & Parade.

[28] Dillon experiences a semi-arid climate (Köppen BSk) with cold, dry winters and hot, wetter summers.