The highway was constructed from north of its present terminus through Chesapeake Beach in the early 1930s.

The highway passes west of the Chesapeake Beach Railway Station, which is preserved as a museum, immediately before crossing Fishing Creek.

The highway heads north along Chesapeake Avenue, which runs one block west of the beach.

The highway becomes state-maintained again as it crosses an unnamed creek at the north town limit, which also forms the Calvert–Anne Arundel county line.

MD 261 continues along Walnut Avenue, which curves west at Holland Point and follows the southern shore of Herring Bay to Rose Haven.

The highway turns south onto Lakeshore Drive, which forms a U-shape as it passes along the edge of Herrington Harbor.

[7][8] MD 261 was widened from 16 to 22 feet (4.9 to 6.7 m) and resurfaced with bituminous stabilized gravel from south of Fishing Creek to the Naval Research Lab in 1950.