It is the centre for commerce and services in the district, and an important link in Iceland's food production.

Economic mainstays are fisheries, dairy production, light industry and broad-based services such as computer and engineering operations, financials, consulting, design and printing.

The natural hot pool located 15 kilometres (9+1⁄2 mi) north of Sauðárkrókur is mentioned in the Grettis saga.

The land where Sauðárkrókur stands was first taken by the Viking Sæmundr Suðureyski ("Sæmundur from the South Islands".

These settlers did not build their homes at Sauðárkrókur, and the current site of the town was not settled until about 1,000 years later.

As the population on the west side of the valley grew, so did the need for an accessible market place; and several times privateers tried their luck by illegally trading from their ships by the shore of Sauðárkrókur.

By 1900 around 400 inhabitants lived here, and the settlement was evolving into a fully formed village with a hospital, school and church.

The average annual precipitation is about 460 mm (20 inches) distributed fairly evenly over the year, although spring and early summer seems to be the driest season.