In 1735, colonial Governor Jonathan Belcher granted lots in the township of "Upper Ashuelot" to 63 settlers who paid £5 each.: 21–22  Settled after 1736 on Equivalent Lands, it was intended to be a fort town protecting the Province of Massachusetts Bay from the French and their Native allies during the French and Indian Wars, the North American front of the Seven Years' War.

When the boundary between the Massachusetts Bay and New Hampshire colonies was fixed in 1741, Upper Ashuelot became part of New Hampshire, although Massachusetts continued supporting the area for its own protection. In 1747, during King George's War, the village was attacked and burned by Natives.: 79  Colonists fled to safety, but would return to rebuild in 1749.: 96  It was regranted to its inhabitants in 1753 by Governor Benning Wentworth, who renamed it "Keene" after Sir Benjamin Keene, English minister to Spain and a West Indies trader.

Located at the center of Cheshire County, Keene was designated as the county seat in 1769. Land was set off for the towns of Sullivan and Roxbury, although Keene would annex 154 acres (0.62 km2) from Swanzey (formerly Lower Ashuelot). Timothy Dwight, the Yale president who chronicled his travels, described the town as "...one of the prettiest in New England." Situated on an ancient lake bed surrounded by hills, the valley with fertile meadows was excellent for farming.

The Ashuelot River was later used to provide water power for sawmills, gristmills and tanneries. After the railroad was constructed to the town in 1848, numerous other industries were established. Keene became a manufacturing center for wooden-ware, pails, chairs, sashes, shutters, doors, pottery, glass, soap, woolen textiles, shoes, saddles, mowing machines, carriages and sleighs.

It also had a brickyard and foundry. Keene was incorporated as a city in 1874, and by 1880 had a population of 6,784. In the early 1900s, the Newburyport Silver Company moved to Keene to take advantage of its skilled workers and location. New England manufacturing declined in the 20th century, however, particularly during the Great Depression.

Keene is today a center for insurance, education, and tourism. The city retains a considerable inventory of fine Victorian architecture from its mill town era. An example is the Keene Public Library, which occupies a Second Empire mansion built about 1869 by manufacturer Henry Colony. Keene's manufacturing success was brought on in part by its importance as a railroad city.

The Cheshire Railroad, Manchester & Keene Railroad, and the Ashuelot Railroad all met here. By the early 1900s all had been absorbed by the Boston & Maine Railroad. Keene was home to a railroad shop complex and two railroad yards. The Manchester & Keene Branch was abandoned following the floods of 1936.

Beginning in 1945, Keene was a stopping point for the Boston & Maine's streamlined trainset known at that time as the Cheshire. Keene became notable in 1962, when F. Nelson Blount chose the city for the site of his Steamtown, U.S.A. attraction. But Blount's plan fell through and, after one operating season in Keene, the museum was relocated to nearby Bellows Falls, Vermont.

The Boston & Maine abandoned the Cheshire Branch in 1972, leaving the Ashuelot Branch as Keene's only rail connection to the outside world. In 1978, the B&M leased switching operations in Keene to the Green Mountain Railroad, which took over the entire Ashuelot Branch in 1982. Passenger decline and track conditions forced the Green Mountain to end service on the Ashuelot Branch in 1983 and return operating rights to the B&M.

However, there were no longer enough customers to warrant service on the line. In 1984, the last train arrived in and departed Keene, consisting of Boston & Maine EMD GP9 1714, pulling flat cars to carry rails removed from the railyard. Track conditions on the Ashuelot Branch were so poor at the time that the engine returned light (without cars) to Brattleboro.

A hi-rail truck was used instead to remove the flatcars. In 1995, the freight house, one of the last remaining railroad buildings in town, burned due to arson. Since the late 20th century, the railroad beds through town have been redeveloped as the Cheshire Rail Trail and the Ashuelot Rail Trail. In 2011, Massachusetts man Thomas Ball immolated himself on the steps of a courthouse in Keene to protest what he considered the court system's abuse of divorced fathers' rights.