The Isthmus of Suez, the sole land bridge between the continents of Africa and Asia, is of relatively recent geologic origin. Both continents once formed a single large continental mass, but during Tertiary (Tertiary Period) times (66.4 to 1.6 million years ago) the great fault structures of the Red Sea and Gulf of Aqaba developed, with the opening and subsequent drowning of the Red Sea trough as far as the Gulf of Suez and the Gulf of Aqaba. In the succeeding Quaternary Period, there was considerable oscillation of sea level, leading finally to the emergence of a low-lying isthmus that broadened northward to a low-lying open coastal plain. There, the Nile delta once extended farther east—as a result of periods of abundant rainfall coincident with the Pleistocene Epoch (1,600,000 to 10,000 years ago)—and two river arms, or distributaries, formerly crossed the northern isthmus, one branch reaching the Mediterranean Sea at the narrowest point of the isthmus and the other entering the sea some nine miles east of present Port Said.

Topographically, the Isthmus of Suez is not uniform; there are three shallow, water-filled depressions—Lake Manzala and Timsah, and the Bitter Lakes, the last, though distinguished as Great and Little, forming one continuous sheet of water. A number of more resistant bands of limestone and gypsum obtrude in the south of the isthmus, and another significant feature is a narrow valley leading from Lake Timsah southwestward toward the middle Nile delta and Cairo. The isthmus is composed of marine sediments, coarser sands, and gravels deposited in the early periods of abundant rainfall, Nile alluvium (especially to the north), and windblown sands.

When first opened in 1869, the canal consisted of a channel barely 26 feet (8 metres) deep, 72 feet wide at the bottom, and 200 to 300 feet wide at the surface. To allow ships to pass each other, passing bays were built every five to six miles. Construction involved the excavation and dredging of 97 million cubic yards (74 million cubic metres) of sediments. Between 1870 and 1884, some 3,000 groundings of ships occurred because of the narrowness and tortuousness of the channel. Major improvements began in 1876, and, after successive widenings and deepenings, the canal by the 1960s had a minimum width of 179 feet at a depth of 33 feet along its banks, and a channel depth of 40 feet at low tide. Also in that period, passing bays were greatly enlarged and new bays constructed, bypasses were made in the Bitter Lakes and at Al-Ballāḥ, stone or cement cladding and steel piling for bank protection were almost entirely completed in areas particularly liable to erosion, tanker anchorages were deepened in Lake Timsah, and new berths were dug at Port Said to facilitate the grouping of ships in convoy. Plans that had been made in 1964 for further enlargement were overtaken by the Arab-Israeli War of June 1967, during which the canal was blocked. The canal remained inoperative until June 1975, when it was reopened and improvements were recommenced.

In 1870, the canal's first full year of operation, there were 486 transits, or fewer than 2 per day. In 1966 there were 21,250, an average of 58 per day, with net tonnage increasing from 437,000 (1870) to 274,000,000. By the mid-1980s the number of daily transits had fallen to an average of 50, but net annual tonnage was about 350,000,000.

The nature of traffic has greatly altered, especially because of the enormous growth in oil (petroleum) shipments from the Persian Gulf since 1950. In 1913, oil in northbound traffic amounted to 291,000 tons; in the peak year of 1966, it amounted to 166,000,000 tons. The closure of the canal from 1967 to 1975 led to the use of large oil tankers on the route around the Cape of Good Hope. Since 1975 the increased size of tankers—the largest of which cannot use the canal—has reduced the canal's importance in the international oil trade. Canal traffic has also been affected by the development of sources of crude oil in Algeria, Libya, Nigeria, the North Sea, and Mexico—all areas outside of the canal route. Competition has also risen from new pipelines to the Mediterranean, including the pipeline from Suez to Alexandria that was opened in 1977.

From an all-time peak in 1945 of 984,000, passenger traffic has declined to negligible numbers because of the competition from aircraft, which also now carry high-value cargoes of small bulk. Further decline in canal traffic resulted from a shift of Australasian trade from Europe to Japan and East Asia. Some movement of oil, however, from refineries in Russia, southern Europe, and Algeria has continued, chiefly to India, and the shipment of dry cargoes, including grain, ores, and metals, has increased. A more recent feature has been the growth of container (lighter aboard ship, or LASH) and roll-on roll-off traffic through the canal, chiefly destined for the highly congested ports of the Red Sea and Persian Gulf. Asia still receives large quantities of North American wheat, corn (maize), and barley through the canal.

The major northbound cargoes consist of crude petroleum and petroleum products, coal, ores and metals, and fabricated metals, as well as wood, oilseeds and oilseed cake, and cereals. Southbound traffic consists of cement, fertilizers, fabricated metals, and cereals. Much southbound traffic consists of empty oil tankers, for supertankers with a deadweight tonnage of up to 200,000 tons can now transit the canal empty but not laden.

Construction of the canal led to the growth of settlements in what had been, except for Suez, almost uninhabited arid territory. More than 70,000 acres (28,000 hectares) were brought under cultivation, and about 8 percent of the total population was engaged in agriculture, with approximately 10,000 commercial and industrial activities of various sizes. In 1967 almost all the population was evacuated, and most of the settlements were severely damaged or destroyed during subsequent warfare. With the reopening of the canal in 1975, however, reconstruction of the area was begun, and most of the population had returned by 1978. Port Said was created a customs-free zone in 1975, and tax-free industrial zones have been established along the canal. The major urban centres are Port Said, with its east-bank counterpart, Būr Fuʾād; Ismailia (Al-Ismāʿīlīyah), on the north shore of Lake Timsah; and Suez, with its west-bank outport, Būr Tawfīq. Water for irrigation and for domestic and industrial use is supplied by the Nile via the Al-Ismʿīlīyah Canal.

There are two roads from the pre-1967 period on the west bank. Ferries have largely been replaced by four underpasses: north of Suez, south and north of Lake Timsah, and at Al-Qanṭarah. From this last, a road continues along the east bank to Būr Fuʾād, and another runs eastward through the Sinai to Israel. Newer roads on the east bank run eastward to the Khutmīyah, Giddi, and Mitla passes, which give access to the central Sinai. The railway on the west side of the canal was restored in the 1970s. In 1980, the Ahmad Hamdi road tunnel was opened, connecting Egypt proper with its governorate (muḥāfaẓah) of Shamāl Sīnāʾ. About one mile of the tunnel passes beneath the canal itself.

The first canal in the region (Egypt, ancient) seems to have been dug about 1850 BC, when an irrigation channel navigable at flood period was constructed into the Wadi Tumelat (al-Ṭumaylāt). This channel was extended by the Ptolemies via the Bitter Lakes as far as the Red Sea. From the region of Lake Timsah a northward arm appears to have reached a former branch of the Nile. Extended under the Romans (ancient Rome) (who called it Trajan's Canal), neglected by the Byzantines, and reopened by the early Arabs, this canal was deliberately filled in by the ʿAbbāsid caliphs for military reasons in AD 775. Throughout, the reason for these changes appears to have been to facilitate trade from the delta lands to the Red Sea rather than to provide a passage to the Mediterranean.

Venetians in the 15th century and the French in the 17th and 18th centuries speculated upon the possibility of making a canal through the isthmus. A canal there would make it possible for ships of their nations to sail directly from the Mediterranean to the Indian Ocean and so dispute the monopoly of the East Indian trade that had been won first by the Portuguese, then by the Dutch, and finally by the English, all of whom used the route around the Cape of Good Hope. These schemes came to nothing.

It was not until the French occupation of Egypt (1798–1801) that the first survey was made across the isthmus. Napoleon (Napoleon I) personally investigated the remains of the ancient canal. J.M. Le Père, his chief lines-of-communication engineer, erroneously calculated that the level of the Red Sea was 33 feet (10 metres) above that of the Mediterranean and, therefore, that locks would be needed. Considering the adverse conditions under which the French surveyors worked and the prevailing belief in the disparity of levels of the two seas, the error was excusable, and Le Père's conclusion was uncritically accepted by a succession of subsequent authors of canal projects. Studies for a canal were made again in 1834 and in 1846. In 1854 Ferdinand de Lesseps (Lesseps, Ferdinand, vicomte de) received an Act of Concession from the viceroy (khedive) of Egypt, Saʿīd Pasha, to construct a canal, and in 1856 a second act conferred on the Suez Canal Company (Compagnie Universelle du Canal Maritime de Suez) the right to operate a maritime canal for 99 years after completion of the work. Construction began in 1859 and took 10 years instead of the 6 that had been envisaged; climatic difficulties, a cholera epidemic in 1865, and early labour troubles all slowed down operations. An initial project was the cutting of a small canal (the Al-Ismāʾīlīyah) from the delta along the Wadi Tumelat, with a southern branch (now called the Al-Suways al-Ḥulwah Canal; the two canals combined were formerly called the Sweet Water Canal) to Suez and a northern one (Al-ʿAbbāsīyah Canal) to Port Said. This supplied drinking water in an otherwise arid area and was completed in 1863.

At first, digging was done by hand with picks and baskets, peasants being drafted as forced labour. Later, dredgers and steam shovels operated by European labourers took over, and, as dredging proved cheaper than dry excavation, the terrain was artificially flooded and dredged wherever possible. Other than in the few areas where rock strata were met, the entire canal was driven through sand or alluvium. In August 1869 the waterway was completed, and it was officially opened with an elaborate ceremony on November 17.

The Suez Canal Company had been incorporated as an Egyptian (Egypt) joint-stock company with its head office in Paris. Despite much early official coolness, even hostility, on the part of Great Britain, de Lesseps was anxious for international participation and offered shares widely. Only the French responded, however, buying 52 percent of the shares; of the remainder, 44 percent was taken up by Saʾīd Pasha. The first board of directors included representatives of 14 countries.

In 1875, financial troubles compelled the new viceroy, Ismāʾīl Pasha (Ismāʿīl Pasha), to sell his holding, which (at the instigation of the prime minister, Benjamin Disraeli (Disraeli, Benjamin, Earl Of Beaconsfield, Viscount Hughenden Of Hughenden)) was at once bought by the British government. Until that year the shares had remained below their issue price of 500 francs each. With the British purchase (at 568 francs each), steady appreciation took place, to more than 3,600 francs in 1900.

Originally allocated 15 percent of the net profits, Egypt later relinquished the percentage and, after the sale of Ismāʿīl's 176,602 shares, remained unrepresented on the board of directors until 1949, when it was, in effect, reinstated as a board member and allotted 7 percent of gross profits. In that year it was also agreed that 90 percent of new clerical jobs and 80 percent of technical appointments would be offered to Egyptians and that the Canal Company would provide hospitals, schools, and other amenities.

In 1956, 13 years before the concession was due to expire, the canal was nationalized by Egyptian President Gamal Abdel Nasser (Nasser, Gamal Abdel). Since then the Egyptian government has exercised complete control, though the original company continues in Paris as a conglomerate.

Although the canal was built to serve, and profit from, international trade, its international status remained undefined for many years. In 1888 the major maritime powers at the time (except Great Britain) signed the Convention of Constantinople, which declared that the canal should be open to ships of all nations in times of both peace and war. In addition, the convention forbade acts of hostility in the waters of the canal and the construction of fortifications on its banks. Great Britain did not sign the convention until 1904.

The history of international use of the canal during wartime includes denial of passage to Spanish warships during the Spanish-American War of 1898 and permission of passage for a squadron of the Russian navy during the Russo-Japanese War in 1905 and for Italian vessels during Italy's invasion of Ethiopia (Italo-Ethiopian War) in 1935–36. Theoretically, the canal was open to all belligerents during World Wars (World War II) I and II, but the naval and military superiority of the Allied forces denied effective use of the canal to the shipping of Germany and its allies.

Following the armistice between Israel and its Arab opponents in 1949, Egypt denied use of the canal to Israel and to all ships trading with Israel. The first of two canal closings occurred during the Suez Crisis of 1956–57, after Israel attacked Egyptian forces and French and British troops occupied part of the canal zone. The second closing was a consequence of the Arab-Israeli war (Arab-Israeli wars) of June 1967, during and after which the canal was the scene of much fighting between Egypt and Israel and for several years formed the front line between the two armies. With the reopening of the canal in June 1975 and the signing of a peace treaty between Egypt and Israel in 1979, all ships (including those of Israeli registration) again had access to the waterway.