Developed around the turn of the 20th century in Australia from crossings of native Australian Terriers and imported Yorkshire Terriers, the Silky Terrier encompasses many of the best qualities of both. The breed was formed when a number of Yorkshire Terriers from England were brought into the Australian states of Victoria and New South Wales at the end of the 1800s. A few of these Yorkshire Terriers were bred to some Australian Terrier bitches in an attempt to improve coat color in the blue and tan Australian Terrier. The resulting litters produced individuals, some of which were exhibited as Australian Terriers, some as Yorkies and some as Silkys.

In 1906 a standard was developed for the Silky in Sydney, New South Wales. In 1909 a separate standard for the new breed was drawn up in Victoria. There were some discrepancies between these two standards. A revised standard was published in 1926. In an effort to protect the Yorkie, the Australian Terrier and the Silky from further crossings, the Kennel Control Council of Victoria introduced canine legislation in 1932.

The breed was originally called the Sydney Silky Terrier. In 1955 the official name for the breed in Australia became the Australian Silky Terrier