The town is situated in the valley of the Saale River north of the Thuringian Highland, 48 km (30 mi) south of the German cultural centre Weimar.

Saalfeld is one of the historic towns of Thuringia, possibly founded by the 7th century around a Thuringii (Gothic) fortress today called Hoher Schwarm or Sorbenburg (Sorbs' Castle).

Kitzerstein Castle standing on an eminence above the Saale River, was said to have been originally erected by the German King Henry the Fowler, although the present-day building was not built before the 16th century.

In 1012 the last Ottonian emperor Henry II ceded the former Carolingian Kaiserpfalz to Count Palatine Ezzo of Lotharingia, whose daughter Richeza bequested it to the Archbishops of Cologne.

According to the local chronicler Lambert of Hersfeld, Archbishop Anno II of Cologne in 1071 established a Benedictine abbey here, which quickly became an ecclesiastical centre in eastern Thuringia but was destroyed during the German Peasants' War in 1526.

Ernest retained the southern Thuringian estates with Saalfeld; his grandson John Frederick I lost the electoral dignity in the 1547 Capitulation of Wittenberg ending the Schmalkaldic War, along with all his possessions outside of Thuringia.

In 1675 Duke Albert V of Saxe-Coburg upon his accession chose the town as his residence and from 1677 onwards had Saalfeld Castle erected on the site of the destroyed Benedictine abbey, which in 1680 fell to his younger brother John Ernest IV.

On 10 October 1806 a united Prussian and Saxon contingent met with a corps of the French Grande Armée under Marshall Jean Lannes at the Battle of Saalfeld, whereby Prince Louis Ferdinand of Prussia was killed.

As a border station its steam locomotive shed assumed extra importance as Saalfeld essentially became the southern terminus of GDR train services.

Today, Saalfeld has a number of prosperous industries, including the manufacture of machinery, bricks, paint, malt, cigars, hosiery, chocolate and vinegar.