Petersham was first settled by Europeans in 1733 and was officially incorporated on April 20, 1754. On February 4, 1787, it was the site of the second battle of Shays’ Rebellion. The town is noted for its common, part of the Petersham Common Historic District. About 45 buildings are listed on the National Register of Historic Places. The Country Store, an 1842 Greek Revival structure that has housed a general store on its main floor since its opening, sits just to the East of the common.

The town’s lands were expanded greatly by the building of the Quabbin Reservoir in 1938. When the towns of the Swift River Valley were disincorporated, Petersham and neighboring New Salem benefited the most, with Petersham receiving all of the former town of Dana, much of the town of Greenwich, and a small portion of the former town of Prescott east of the Middle Branch of the Swift River. Its modern southwestern borders lie along the former East and Middle branches of the Swift River, and includes lands that were once part of Hampshire County.

A memorial was erected in the town in 1927 by the New England Society of Brooklyn, New York. The memorial commemorates General Benjamin Lincoln, who raised 3,000 troops and routed the rebellion on February 4, 1787. It ends with the line, “Obedience to the law is true liberty.”

As of the census of 2000, there were 1,180 people, 438 households, and 299 families residing in the town. The population density was 21.8 people per square mile (8.4/km²). There were 474 housing units at an average density of 8.7 per square mile (3.4/km²). The racial makeup of the town was 97.20% White, 0.68% African American, 0.76% Native American, 0.25% Asian, 0.08% from other races, and 1.02% from two or more races. Hispanic or Latino of any race were 1.10% of the population.

There were 438 households, out of which 29.5% had children under the age of 18 living with them, 59.6% were married couples living together, 5.5% had a female householder with no husband present, and 31.7% were non-families. 27.2% of all households were made up of individuals, and 11.4% had someone living alone who was 65 years of age or older. The average household size was 2.48 and the average family size was 3.04.

In the town, the population was spread out, with 22.4% under the age of 18, 4.3% from 18 to 24, 27.0% from 25 to 44, 28.7% from 45 to 64, and 17.5% who were 65 years of age or older. The median age was 43 years. For every 100 females, there were 101.4 males. For every 100 females age 18 and over, there were 95.7 males.

The median income for a household in the town was $47,833, and the median income for a family was $58,125. Males had a median income of $39,265 versus $26,354 for females. The per capita income for the town was $24,222. About 2.0% of families and 5.8% of the population were below the poverty line, including 4.2% of those under age 18 and 1.5% of those age 65 or over.