Not much is identified with Bhutan's history before the 7th century, which is when Buddhism was introduced.  After this time, the chronicles kept by Buddhists record Bhutan's history.  Buddhism was brought in to Bhutan when the country was ruled by feudal lords in their separate valleys, not a central government.

After monks from the Kargyupa sect of Mahayana Buddhism built monasteries throughout the valleys, the Drukpa subsect became the most popular form of religion.  A Drukpa monk, Ngawang Namgyal, started the first formal government in 1616 - that of a theocratic government.  Namgyal was able to unite the influential Bhutanese families, this after he defeated many challengers subsect leaders.

Namgyal's government consisted of two leaders - one with spiritual responsibilities (dharma raja) and the other with civil responsibilities (deb raja).  This split form of government continued until the early 1900's.  

Conflict occurred in Bhutan approximately 100 years after the deb raja formed a peace treaty with the English East India Company.  Rivalry was rampant between two governors in Bhutan (of Tongsa and Paro) who held staunchly opposite views toward the British.  Ugyen Wangchuck, the pro-British governor, was able to unite the country after defeating all his opponents.

In 1907 Ugyen Wangchuck became the first druk gyalpo of Bhutan and he ruled from 1907 to 1926.  Jigme Wangchuck, Ugyen's son, ruled from 1926 to 1952 and was followed by Jigme Dorji Wangchuck who ruled from 1953 to 1972.  The fourth druk gyalpo, Jigme Singye Wangchuck began his reign in 1972.

Stone tools, weapons, elephants, and remnants of large stone structures provide evidence that Bhutan was inhabited as early as 2000 BC, although there are no existing records from that time. Historians have theorized that the state of Lhomon (literally, "southern darkness", a reference to the indigenous Mon religion), or Monyul ("Dark Land", a reference to the Monpa, the aboriginal peoples of Bhutan) may have existed between 500 BC and AD 600. The names Lhomon Tsendenjong (Sandalwood Country), and Lhomon Khashi, or Southern Mon (country of four approaches), have been found in ancient Bhutanese and Tibetan chronicles.

The earliest transcribed event in Bhutan was the passage of the Buddhist saint Padma Sambhava (also known as Guru Rinpoche) in 747. Bhutan's early history is unclear, because most of the records were destroyed after fire ravaged the ancient capital, Punakha, in 1827. By the 10th century, Bhutan's political development was heavily influenced by its religious history. Various sub-sects of Buddhism emerged which were patronized by the various Mongol warlords. After the decline of the Mongols in the 14th century, these sub-sects vied with each other for supremacy in the political and religious landscape, eventually leading to the ascendancy of the Drukpa sub-sect by the 16th century.

Until the early 17th century, Bhutan existed as a patchwork of minor warring fiefdoms, when the area was unified by the Tibetan lama and military leader Shabdrung Ngawang Namgyal who fled religious persecution in Tibet. To defend the country against intermittent Tibetan forays, Namgyal built a network of impregnable dzong (fortresses), and promulgated the Tsa Yig, a code of law that helped to bring local lords under centralized control. Many such dzong still exist and are active centers of religion and district administration. Portuguese Jesuit Estêvão Cacella and another priest were the first recorded Europeans to visit Bhutan on their way to Tibet. They met with Ngawang Namgyal, presented him with firearms, gunpowder and a telescope, and offered him their services in the war against Tibet, but the Shabdrung declined the offer. After a stay of nearly eight months Cacella wrote a long letter from the Chagri Monastery reporting on his travels. This is a rare extant report of the Shabdrung.

After Namgyal's death in 1651, Bhutan fell into civil war. Taking advantage of the chaos, the Tibetans attacked Bhutan in 1710, and again in 1730 with the help of the Mongols. Both assaults were successfully thwarted, and an armistice was signed in 1759.

In the 18th century, the Bhutanese invaded and occupied the kingdom of Cooch Behar to the south. In 1772, Cooch Behar appealed to the British East India Company which assisted them in ousting the Bhutanese, and later in attacking Bhutan itself in 1774. A peace treaty was signed in which Bhutan agreed to retreat to its pre-1730 borders. However, the peace was tenuous, and border skirmishes with the British were to continue for the next 100 years. The skirmishes eventually led to the Duar War (1864–1865), a confrontation for control of the Bengal Duars. After Bhutan lost the war, the Treaty of Sinchula was signed between British India and Bhutan. As part of the war reparations, the Duars were ceded to the United Kingdom in exchange for a rent of Rs. 50,000. The treaty ended all hostilities between British India and Bhutan.

During the 1870s, power struggles between the rival valleys of Paro and Tongsa led to civil war in Bhutan, eventually leading to the ascendancy of Ugyen Wangchuck, the ponlop (governor) of Tongsa. From his power base in central Bhutan, Ugyen Wangchuck defeated his political enemies and united the country following several civil wars and rebellions in the period 1882–1885.

In 1907, an epochal year for the country, Ugyen Wangchuck was unanimously chosen as the hereditary king of the country by an assembly of leading Buddhist monks, government officials, and heads of important families. The British government promptly recognized the new monarchy, and in 1910 Bhutan signed a treaty which "let" Great Britain "guide" Bhutan's foreign affairs. In reality, this did not mean much given Bhutan's historical reticence. It also did not seem to apply to Bhutan's traditional relations with Tibet.

After India gained independence from the United Kingdom on 15 August 1947, Bhutan became one of the first countries to recognize India's independence. A treaty similar to that of 1910 in which Britain gained power with respect to Bhutan's foreign relations was signed 8 August 1949 with the newly independent India.

In 1953, King Jigme Dorji Wangchuck established the country's legislature – a 130-member National Assembly – to promote a more democratic form of governance. In 1965, he set up a Royal Advisory Council, and in 1968 he formed a Cabinet. In 1971, Bhutan was admitted to the United Nations, having held observer status for three years. In July 1972, Jigme Singye Wangchuck ascended to the throne at the age of 16 after the death of his father, Dorji Wangchuck.

In late 2003, the Bhutanese army successfully launched a large-scale operation to flush out anti-India insurgents who were operating training camps in southern Bhutan. It is called Operation: All Clear and the Royal Bhutan Army drove out the United Liberation Front of Asom (ULFA), National Democratic Front of Bodoland (NDFB), and Kamtapur Liberation Organization (KLO) insurgent groups hiding in Bhutan's jungles.

Democratic reform and modernization

King Jigme Singye Wangchuck introduced significant political reforms, transferring most of his administrative powers to the Council of Cabinet Ministers and allowing for impeachment of the King by a two-thirds majority of the National Assembly.

In 1999, the government lifted a ban on television and the Internet, making Bhutan one of the last countries to introduce television. In his speech, the King said that television was a critical step to the modernisation of Bhutan as well as a major contributor to the country's Gross National Happiness (Bhutan is the only country to measure happiness), but warned that the "misuse" of television could erode traditional Bhutanese values.

A new constitution was presented in early 2005. In December 2005, Jigme Singye Wangchuck announced that he would abdicate the throne in his son's favor in 2008. On 14 December 2006, he announced that he would be abdicating immediately. This was followed with the first national parliamentary elections in December 2007 and March 2008.

On November 6, 2008, 28-year old Jigme Khesar Namgyel Wangchuck, eldest son of King Jigme Singye Wangchuck, was crowned King.