Ca.630 a monastery was founded by the East Anglian king Sigeberht at a small settlement called Bedricsworth, which developed into a royal vill; Sigeberht himself retired into the monastery. The fate of that monastery in the face of the Danish invasion is uncertain, but about half a century after the torture and murder of King Edmund, killed (870) by Danish captors who had defeated his forces, the king's body was moved to the Bedricsworth and a church founded to house the shrine. He was already considered a martyr and a saint, and the presence of his shrine added something to the existing importance of Bedricsworth in East Anglia. In 945 another King Edmund granted the chapel containing the shrine control over the town and its suburbs, so that revenues from the same could support the shrine, and in the years that followed the foundation is seen acquiring substantial landholdings by donation or bequest. The presence of a mint in the town by the late tenth century is further evidence of how it was prospering. It also served as the administrative centre for West Suffolk, comprising eight and a half hundreds (the town being one and a half of those), whose populations convened at a folkmoot on a hill called Thinghoe, just north of the town.

The Anglo-Saxon town was probably gathered around a north-south route (Northgate/Southgate) which ran past Thinghoe, and focused on a crossroads at the junction with Eastgate, the section of which at the junction was later known as Le Mustowe Strete, suggesting the location there of the meeting-place of the town moot, possibly in a cemetery of the church housing St. Edmund's tomb. This area was offered some protection on three sides by the rivers Linnet and Lark. The unprotected western side much later was protected by a wall, linking Northgate and Westgate, probably preceded by a ditch-rampart fortification; Southgate, as the likely focus of the pre-abbey settlement, may also have had such fortifications supplementing the protection from the water-barriers.

Around 1020 the shrine, serviced by a community of secular clerics, was superseded by a new monastic foundation of Benedictines, transferred from Ely and St. Benet's of Holme, possibly an initiative of Cnut to gain legitimacy in the eyes of his newly-conquered subjects. The new abbey took over control of the town and suburbs, an area which came to be known as the banleuca. In 1044 Edward the Confessor gave the abbot even wider authority, over eight and a half hundreds and over the manor of Mildenhall; this area became known as the liberty of St. Edmund's. It had previously been under the lordship of his mother, Emma, disgraced the previous year for treason, and now Edward had to find a new lord without upsetting the balance of power in East Anglia; he settled for the abbey (whose abbot he expected to be able to nominate), even though this meant placing extensive jurisdiction and its revenues outside direct royal control. He later (1065) transferred jurisdiction of the royal mint to the abbey; while another grant of the Confessor, of date unknown, gave the abbey permission to tax its men when the king taxed his. The name Bedricsworth was now giving way to "St. Edmund's borough". The needs of the abbey generated increasing employment for the town's labourers, craftsmen and administrators (Domesday mentioning 13 reeves living in the town who were responsible for managing abbey lands), and business for its traders.

That St. Edmund was virtually a national saint ensured that the king continued to favour the abbey and ensure its interests were protected. The wealth and power accumulated by the abbey, in part through further gifts of land, as well as from visitation by pilgrims to St. Edmund's shrine, in turn spurred the economic development of the town, which was a market centre for the region needs and a source of goods and services to the abbey. Just before the Conquest, the newly-appointed Abbot Baldwin initiated a major programme to rebuild the abbey and also planned an expansion of the town, 342 new houses being built over the next two decades; as a Frenchman he was able to weather the political changes at the Conquest, and import fellow countrymen as new settlers. These projects were continued by his predecessors into the next century. It may have been at this time that the abbey precinct expanded across Southgate to disconnect it from Northgate; the purpose of the new sector of the town may have been in part to relocate those residents displaced by the abbey expansion, but it was doubtless also to attract new settlers.

This building programme provided rents and service obligations to the abbey. The Norman grid of a planned town is evident in the street pattern of central Bury St. Edmunds. The new town was equipped with its own marketplace, likewise a source of income to the abbey through ground rents and tolls; this marketplace was, in the thirteenth century, acquiring pre-eminence over the marketplace of the older part of town, on the south side of the abbey. The section of town south of the abbey likely represents the focus of habitation for the pre-Conquest residents.

The town may have had borough status before the Conquest, although the Domesday entry does not specify that nor does it refer to the inhabitants as burgesses. A grant of William Rufus spoke of the abbot's rights infra burgum et extra indicating the intra-mural area had some distinction in status. A charter of Henry I (ca.1102) confirmed to the abbey and the burgesses all liberties they had possessed in the first half of the eleventh century. Whether this, or some initiative originating from the abbey, was the causative factor that made the town free, as Jocelin de Brakelond (probably the monastery's cellarer)referred to it in his chronicle, is hard to say; but evidently the townspeople within the walls had rid themselves of some manorial services, via commutation, before the period of which Jocelin writes, and were differentiated from the suburban residents in such regards. The prosperity coming from local commerce and industry, contrasted with the fact of the abbey's extensive control over economic and administrative affairs, stimulated the townspeople's inclinations to free themselves from what they viewed as the oppressive elements of the abbey's lordship, draining money out of the community while obstructing entreneurial ambitions.

The charter of Abbot Anselm – essentially just a recognition of borough customs, rather than the concession of new privileges or powers – was probably that for which the townsmen are recorded by Jocelin de Brakelond as purchasing from Abbot Sampson a confirmation in the 1190s. It is worth comparing these customs with those of the Newcastle burgesses, from a similar period.