The town was first mentioned in a document (now considered to be a fake) in 1137, when Hallgraf Engelbert moved his residence from the nearby castle Limburg to his "Wasserburg" (Water Castle).
It is one of the most historic towns of Old Bavaria – somewhat older than Munich, continually fought over by the Bavarian nobility and, up to the 16th century, on an equal footing with larger cities. The privileges afforded by this enabled the salt trade to flourish right into the 19th century. At the junction of the main overland route with the main water route, Wasserburg became the most important trade centre with the Balkans, Austria and Italy, a means of attaining power and wealth for the shipping owners and merchants.
In the early days, Wasserburg was an important hub in the salt trade. Its bridge was the only possibility to cross the river Inn for 30 km in both directions. On its shore the salt, mined in Berchtesgaden or produced in the Saline (saltern) at Bad Reichenhall and shipped from there by cart, could be loaded on ships travelling on the Inn River. Up to the 17th century Wasserburg was used as the port of the capital Munich.
Up until 1972, when it was merged with the district Rosenheim, Wasserburg was a district capital on its own.