According to some opinions, Sveti Stefan is «the New town» mentioned by Porphyrogenitus because it is situated opposite the Old town i.e. Budva. However, for now, no reliable data can confirm these indications about the origin of Sveti Stefan. Even its first mention in the 15th century is rather vague. The settlement was first documented in 1442, when members of the Paštrovic clan, led by Radic Paštrovic and his brothers, from the sea fortress opposed Stevan Vukcic, the great duke of Bosnia, who gained control over the Upper Zeta after wining the Crnojevics over to his side. These historical data can only refer to Sveti Stefan.
According to tradition, Sveti Stefan – the centre of the Paštrovic area - was built in the late 15th or early 16th century. «Originally, each of twelve tribes of the Paštrovic clan built a house in the settlement, in which women and children took refuge in times of enemy attacks. Over the time, Paštrovics build magazines, houses and small churches there. Almost each house had a magazine in the ground level, in which owners used to store different domestic products, mostly fat and olive oil, which they exported to Venice . Sveti Stefan used to be the seat of “bankada” (a parliamentary body of the Paštrovi cs) for two - three hundred years»
A legend says that the fortress was built after a battle against the Turks, from the booty taken in the battle. Judging by the fortification walls, which do not contain remains of construction from the period before the introduction of firearms, we can conclude that it was built in the 15th century, at the earliest. The Turks destroyed the fortification during the Cyprus war, and over the 16th and 17th centuries, the Paštrovics repeatedly demanded form Venice to rebuild the fortification because it was of vital importance to them.
Being situated on an island the settlement was suitable for defense. On the side facing the coast, the walls were slightly stronger with a kind of a minor tower. The walls also existed on the east side, while on other sides they were not needed. The settlement probably developed around the old church of St. Stefan situated at the top of the island. The church of St. Transfiguration from 1693 and a smaller one in the west part of the island are also found in the town. The streets are broken and winding, like in all coastal towns. Mostly they run in the east-west direction - due to the terrain configuration.
In the 20th century, the town was turned into a hotel after moving out the remaining inhabitants.