The establishment of Gunnison in 1862 resulted from the resettlement and merging of two earlier communities, each built up in 1859 along the lower Sanpitch River in upper Gunnison Valley. A group of settlers from Sanpete County had started a village on the south bank of the river at Chalk Hill Point about two miles east of the eventual town. At about the same time, a group of colonists from Springville and other places formed a settlement about three miles west of Chalk Hill. They called the place Kearns Camp after their leader, Mormon Bishop H. H. Kearns. Simple houses were erected at each location, with the intention of creating permanent communities. The impetus for settlement in the area had come from Brigham Young after his tour from Manti to the Sevier Valley and the southern colonies in May 1850. During a return visit in 1862, Young saw the limitations of the swampy area, which was termed "too muddy for a hog's wallow"; he advised the people to move up to the bench area, where a new town was built.

The town was named in honor of government explorer Captain John Gunnison, who was killed with six of his men by Indians while in the Sevier Valley area in 1853. Edward Fox surveyed the townsite in rectangular eight-acre blocks and James Mellet erected the first house as the pioneers dismantled and carted their earlier structures to the new site in late 1862. They were now a long distance from water, so the first public task was to dig a ditch from the river to the bench-top town. Early settlement efforts were hampered by difficulties with Indians during the Black Hawk War. Although a few settlers died in skirmishes, an unexpected benefit occurred in April 1867 when some of the people evacuated from the Sevier County colonies relocated permanently to Gunnison.