The unincorporated village was called Depot, New Webster, and Webster Station until the state legislature had its name officially changed to Dillsboro when the village was incorporated as a town in 1889 to honor William Allen Dills, the town's founder[6] (another source names George W. Dill, an early settler.

[9] In a relatively short time period, Dillsboro became a thriving town; by 1888, it was the most important town on the Murphy Branch of the Southern Railway in the areas of Industry, with two sawmills, two clay mines, a locust pin company, a corundum crushing plant, a chestnut pole yard, a chestnut corkwood yard, two livery stables, six general stores, a large hotel, and a shoemaker.

Around 1899, Dillsboro was the most-populated non-county seat town in the state west of Asheville with about 750 residents.

[10] Dillsboro's population has declined over the years, mostly due to little new housing being built in town limits and the fact that many homes are now shops in the downtown area.

Since 1975, when Wade W. Wilson became mayor due to many write-in votes, Dillsboro has made a successful effort to restore many older buildings in the town to their original appearance.

[13] According to the United States Census Bureau, the town has a total area of 0.4 square miles (1.0 km2), all land.

[dubious – discuss] As of the 2020 United States census, there were 213 people, 112 households, and 53 families residing in the town.

The train wreck scene in the movie The Fugitive (1993) was filmed on a portion of the Great Smoky Mountains Railroad in Dillsboro.