During 1941, Avro elected to begin development of a new civil-orientated transport aircraft. In the midst of an uncertain stage of the Second World War, Britain's aircraft industry was preoccupied by urgent wartime demands, not only to produce military aircraft, but to design increasingly capable models as well, the company's decision to embark on this venture was considered to be ambitious, especially as the development project operated with no official backing early on. The project may well have been influenced by a shortage of transport aircraft, as well as by the formation of the British Overseas Airways Corporation (BOAC), in 1940, to run all of the nation's overseas civil air routes. However, according to aviation author Donald Hannah, there was little incentive and few materials available for the construction of transport aircraft, it was impossible to predict when the war would end and, thus, when large-scale demand for civil aircraft would return.
Roy Chadwick, Avro's chief designer, had foreseen a need for a transport aircraft that was powered by four-engines and would be capable of flying for long ranges. The design, which was designated as the Type 685, had its origins in the company's then-newly developed four-engined bomber, the Avro Lancaster, which had only made its first flight earlier that year. The Type 685 paired various elements of the Lancaster, such as its wings, tail assembly and undercarriage and Rolls-Royce Merlin engines, with a completely freshly-designed square-section fuselage that provided double the internal capacity of the Lancaster. The two aircraft also substantially differed in external appearance.
In February 1942, Chadwick submitted his drawings to Avro's experimental department. Within five months, the company refined the design and had quickly assembled an initial prototype. On 5 July 1942, the York prototype, LV626, conducted its maiden flight from Ringway Airport, Manchester. It had initially been fitted with the twin fins and rudders of the Lancaster but the increased fuselage side area forward of the wing compared to the Lancaster necessitated fitting a third central fin to retain adequate control and directional stability; the third fin was fitted as standard on subsequent production aircraft. Flight trials of LV626 were quickly transferred to RAF Boscombe Down. In response to the prototype's favourable performance during trials, the Air Ministry issued an order for three more prototypes of various configurations to be built along with an initial production batch under Specification C.1/42, part of Operational Requirement OR.113 for a new transport aircraft.
The prototypes were used to test various adaptions and potential roles for the aircraft. LV626, the first prototype, was rebuilt to the C.II standard, the principal modification of which was the installation of Bristol Hercules VI radial engines in place of the Merlins; it was later decided to standardise on the Merlin engine, leaving this as the sole Hercules-powered York. The fourth prototype, LV639, was furnished as a paratroop transport, complete with ventral dropping doors. However, flight testing found that the York was unsuited to this role, due to the slipstream wash drawing the parachutes towards the non-retracting tailwheel, posing an entanglement risk.
Production of the York proved difficult to speed up, due to shortages of key materials, moreover, Avro was also obligated to place a high priority on the manufacturing and refinement of the Lancaster. Officials had also judged that there was no requirement for large numbers of Yorks at that time. By the end of 1943, only the four prototypes and three production aircraft had been manufactured, but production was scheduled to rise to three aircraft per month throughout 1944. Early production Yorks were principally used as a VIP transport aircraft; notably, the third prototype, LV633 being luxuriously fitted out and becoming the personal transport of Winston Churchill.
On 25 March 1943, RAF Transport Command had been formed, which soon established a clear requirement for the strengthening of Britain's air transport forces; the York became the first British aircraft to be used in quantity by Transport Command. The first RAF production order consisted of 200 aircraft; while a further 100 were ordered under a second order placed shortly after. Throughout 1944, the majority of Yorks produced were passenger transport aircraft, a batch of both pure freighters and combined passenger/freighter-configured Yorks were also manufactured. Several early production aircraft intended for RAF service were instead diverted to BOAC, who had otherwise received little in the way of similar aircraft prior to delivery of the first York in April 1944.
Initial assembly and testing of production Yorks, which were principally destined for service with the Royal Air Force (RAF) at that time, was performed at Ringway, reaching its peak in 1945; these activities later being transferred to facilities in Yeadon, Leeds and Woodford, Cheshire, where work was undertaken at a slower pace. Only eight aircraft of the second order for 100 aircraft were produced; in April 1948, the final York, PE108, was completed.
Abroad, a single-pattern aircraft was completed by Victory Aircraft in Canada; however, no further orders were received. Victory had tooled up for the manufacture of 30 aircraft and had built parts for five aircraft, but, ultimately, only one would be completed around the time that the war came to an end. This aircraft would later be purchased by Swedish airline Skyways.