The origins of founding Mrągowo are connected with a settlement campaign organized by the Teutonic Order at the turn of the 14th and 15th century. However, as early as 1348 there was supposed to be a Teutonic watchtower in the area and pre-war archaeological research conducted by University of Królewiec proved that even earlier old Prussian settlement existed here and was located on an island on Czos lake (currently the Ostrów peninsula). In 1404–1407 komtur of Bałgi, Johann von Sayn, granted the town privileges under the Kulm law. Renewal of town privileges took place in 1444. For ages Mrągowo was only a trade and craft centre (St. Martin's fairs – 11th November, from 1513 – St. Nicholas fairs – 6th December) but not administrative because until the turn of the 18th and 19th century the seat of starosty was located in nearby Szestno. In time the town was subject to gradual Polonization. Even famous rector of 1485, Stanisław, was a Pole. After 1525 the town belonged to the Duchy of Prussia. Its Polish name was Ządzbork or Ządźbork.
On 24 June 1698 as many as over 130 buildings of the town were consumed by the great fire. During rebuilding works new spatial layout was imposed with wider and straighter streets and buildings of the same height. From 1719 there was also a garrison in the town. In the 18th century, at former Ogrodowa Street (today's Roosevelta) craft district emerged.
The 19th century brought about both Germanization, as well as increase of the town's status, partially at the cost of nearby Szestno. In 1818 Ządzborski district was established. In 1822 there was again a great fire, destroying 50% of the buildings. Reconstruction was another occasion for modernization and development of the town. In 1825 a new town hall was erected, where also starosty and the court were located. The town constituted a melting pot with various nationalities, including Jews and Russian Old Believers from Wojnów and Margrabowa (Olecko).Also Catholics from Warmia came here and for them, in 1859, a new church was constructed. In 1875, the town had about 3321 inhabitants and in 1890 – 3562, including 250 Catholics and 115 Jews. Increase in the population corresponded with economic growth. Moreover, during the entire period the town was also a garrison. In 1887 a narrow-gauge railway line to Kętrzyn (Rastembork) was set up and in 1888 a standard railway line to Czerwonka and Ruciane. In 1911 the railway station was turned into a railway nod after opening a new line to Orzysz, which in 1915 was extended to Ełk. In 1889 the town was connected to gas supply and in 1900 sewage and water supply system. In 1903 a new school and hospital were erected and in 1913 – a starosty office. Herman Jaenike, the mayor of Mrągowo in about 1885–1918, played an important role in its development.
After the referendum of November 1920 it was decided that Ządzbork remains a part of Germany. The 1920s' was a period of further investments, among others to construct schools, hotels and residential houses. In 1939 the town was inhabited by 9880 people. The Nazi period in Germany brought about repressions against minorities – especially Poles and Jews. During the Second World War prison camps were operating in the area.
On 27 January 1945 the Red Army entered the town. 20% of the buildings were destroyed, mostly in the Old Town. Despite that fact in Mrągowo there is one of the best preserved group of buildings from the turn of the 19th and 20th century. Staring from mid-year German inhabitants were dislocated and expatriates from Wileńszczyzna and settlers from central Poland were brought to the town. In 1947 Commission of Changing Place Names changed the town's name from Ządzbork (Ządźbork) to Mrągowo – to honour Krzysztof Celestyn Mrongowiusz – a clergyman, Polish activist and linguist of the turn of the 18th and 19th century, who came from Olsztynek. Nowadays, the town is one of the biggest tourist destinations of Mazury, also famous for its Piknik Country festival organized since 1982. Since 1999 the town is the capital of the district in Warmińsko-Mazurskie province.
- Z dziejów Mrągowa i okolic, Olsztyn 1989.