There are 2 versions about the foundation of Mstera. According to one version, settlements in this territory of the Vyazniki district were first mentioned in September 1521. Research of documents in the Russian State Archive of Ancient Acts and the Russian State Historical Archive was carried out by Elena Kurbakova, a Doctor of Historical Sciences, and Viktor Baranov, an expert of the Ministry of Culture of the Russian Federation on cultural values​.

According to another version, the first mention of the Epiphany churchyard on the Mstera River, which belonged to the estate of the Romodanovsky princes, is found in the scribe books of 1628; a little later it began to be called the Epiphany Sloboda. The sloboda, which became a village, received its modern name in the 19th century. At the end of the 17th through the beginning of the 18th centuries, icon painting originated in Mstera. The peasant reform of 1861 gave further impetus to the development of folk crafts in Mstera.
Before the revolution, the village was the centre of the Mstera volost of the Vyazniki district.

At the end of the 19th century, a small factory was opened for the production of frames for icons; in 1908 a copper rolling plant was founded. On its basis, in Soviet times, a jewellery artel was created to be transformed into a factory in 1960, and into a plant in 1972. In 1985–1986, the plant produced more than 1 million pieces of Orders of the Patriotic War of the 2nd Class made of silver.
Historically, Mstera was a centre for the production of icons. According to statistics for 1911, there were 18 icon painting establishments in Mstera. 4 companies made icon cases, 24 carried out foil work, and there were 8 chasuble-weaving workshops. There were also 3 brick factories in the city.

In 1923, N.P. Klykov and A. I. Bryagin, handicraft icon painters, arranged a small artel called Old Russian Folk Painting. In 1931, a larger artel called Proletarian Art was set up to connect Mstera artists and former icon painters who worked in the technique of varnish painting.

One of the important crafts of Mstera is lace embroidery. Before the revolution, craftswomen created utilitarian items, but after the establishment of Soviet power, embroiderers began to create monumental panels depicting leaders or propaganda subjects.

Mstera has had the status of an urban-type settlement since 1935.