Lacock was situated on the west side of the River Avon, and crossed by a stream that emptied into the river; royal forest lay on its opposite side. A Roman road between London and Bath passed through the southern part of the parish to reach a crossing of the River Avon at what was later known as Reybridge. The earliest mention of Lacock is in 1086, when the manor was held by the sheriff, Edward of Salisbury, whose descendants became earls; its village was fairly small, and no church is mentioned, though one existed at the time of the foundation of the abbey there. The village had grown up close to the church built in the late eleventh century; east of the church was the future site of the abbey, perhaps previously occupied by the manor-house. Immediately west of the churchyard, along the street leading from through-road to the church, could have been the site of an early market.

Lacock abbey was founded as an Augustinian nunnery by Ela, daughter and heiress of the Earl of Salisbury, a descendant of the Edward of Salisbury who was sheriff of Wiltshire at the time of Domesday; she married William de Longespée, an illegitimate son of Henry II, who took the title of earl by her right, and after his death (1226) served as sheriff of Wiltshire for at least two years – a rare office for a woman. in 1229 she donated the manor of Lacock as the initial step towards founding the abbey; the first nuns were veiled and the abbey officially 'founded' in 1232. Ela took up the veil herself in 1238 and was abbess in 1240, retiring from that post a few years before her death in 1261.

The abbey was built on a meadow between the village to the west and the Avon to the east. Building continued into the 1280s, with further additions in the next century, but the main structure was probably complete by 1247. The village and manor of Lacock became the nucleus for a widespread estate of endowments that were built up. In 1237 the king granted the abbey a three-day fair in July, and ordered the sheriff to have the charter grant read out in a full session of the county court, in addition to arranging for public proclamations of the fair. This was followed in 1242 by the issue of a licence for a Tuesday market. In 1257 a second fair (to last for a full week in June) and a Monday market were granted, and in 1260 a Friday market was also authorized. These augmentations do not necessarily reflect so much a growth in commercial activity as they do royal benefaction to a religious house. Ela was instrumental in obtaining all these grants, during her abbacy and after her retirement; she died in 1261. The community she created was not a large one, but the nuns were drawn from land-owning families of the region and those of more prosperous townspeople.

That the foundation of the abbey and acquisition of fair and market rights were accompanied by establishment of a town at Lacock is indicated by references, in the abbey cartulary and surviving deeds, to burgages there as early as the abbacy of Ela; both burgages and burgesses are mentioned again ca. 1280. We know a good deal more about the abbey than about the town. The new town's streets were laid out as a rough rectangle, which could be considered a grid pattern, with Church Street and the High Street being the parallel components running east-west, linked by the parallel East and West Streets. The stream mentioned above formed the northern edge of the laid-out property plots and, since the planned town surrounded the churchyard, it may have replaced rather than extended the older village, although the latter might have lain along the through-road, somewhat north-west of the church. West Street was part of an existing through-road between Melksham (market granted to the residents, king's tenants, 1219) and Chippenham. The High Street served as the new marketplace; a cross was erected there, and in 1350 we hear of the 'Tolselde' in the market – doubtless a hut where market tolls were payable. From the east end of the marketplace ran a road, skirting the abbey precinct, to the Avon crossing at Reybridge, at the southern tip of the abbey precinct; this took the form of a ford and packhorse bridge. That it was part of a route by which cloth was transported from Bath to London, and the only point in those parts where the Avon could be crossed, must have aided the growth of commercial prosperity, and of the cloth-making industry, at Lacock. We know that in the thirteenth and fourteenth centuries traders came to Lacock's fairs from as far afield as Old Salisbury and the Gloucestershire town of Marshfield.

The abbey, which was fairly well-endowed, prosperous, and well-maintained, must have provided employment for some locals, for it required farm-workers, livestock herders, wagoners, and various servants in capacities such as smith, baker, brewer, poulterer, fisherman, cook, domestics, and laundresses. In 1476 the abbey owned flocks totalling over 2,000 sheep, and abbey wool was all gathered at a storehouse in Lacock; much would have been sold to the king or other clients. Some was kept for making cloth for the community of nuns, much of the weaving and fulling work probably handled by the townspeople – it has been suggested that the unusual width of some Lacock houses (medieval fabric from which survives in a number of instances) served to accommodate weaving-looms. A series of highly productive pottery and tile kilns were operated in a field on Naish Hill, just east of Lacock, from the thirteenth century; excavation has shown that floor and roof tiles were manufactured initially, and the operation later expanded to produce finials, louvers, water pipes, and a wide range of pots, pitchers, bowls and cooking utensils. Lacock abbey might have controlled the kilns, but it is more likely they represent an enterprise by the Crocker family (the surname deriving from an Old English term for potter), documented as residing in Lacock by the late thirteenth century and possibly evidenced as the tenants of the field; whether the Crockers themselves carried out the work or employed a team of potters and tilers to do so is unknown. This business may have been given its start by the major reconstruction in mid- to late century underway at the nearby abbeys of Lacock and Stanley, which would have been heavy consumers of the kiln products.

Lacock remained a small market town during the Middle Ages, expanding little beyond its medieval core. By-passed by the Industrial Revolution, the railway, and the redeveloped road system, it declined to village status; but this isolation has happily enabled the preservation of a certain degree of medieval character there.