In 1861 the Aberystwith and Welsh Coast Railway received parliamentary authorisation to build along Cardigan Bay between Aberystwyth and Porthdinllaen on the Llyn Peninsula. The last five miles were never built. Cost over-runs, geological difficulties around Aberdaron, and the rise of Holyhead as the favoured Irish packet port all conspired against the western extension. By 1865 the company had been absorbed into Cambrian Railways. When the first Pwllheli station opened on Thursday 10 October 1867 the line had already been quietly truncated, and the station, half a mile from the town centre on what was then open ground, became the terminus by default. A small newspaper notice in The Carnarvon and Denbigh Herald marked the occasion.

On 19 July 1909, after land reclamation work allowed the rails to be extended closer to the town, a new Pwllheli station opened nearer the centre, with two through-tracks separated by an island platform and a small loading dock to the north. The old 1867 station became a goods yard; its turntable, used for years to spin locomotives at the end of the line, was eventually saved and is now preserved by the West Somerset Railway. Under Great Western Railway ownership from the 1920s the track was doubled between the station and the goods yard to increase capacity, and through the steam era Pwllheli was a busy junction running named express services. The Cambrian Coast Express ran via Machynlleth, Shrewsbury, and Birmingham New Street to London Paddington. The Welshman ran via Caernarfon and Crewe to London Euston. Pwllheli was a real seaside terminus, brass-buckled and busy.

The collapse came in stages. The Afon Wen to Caernarfon line, which had given Pwllheli its northbound link to Bangor and the Welshman route to Euston, was closed in 1964 as part of the Beeching cuts. The Cambrian Coast Express ran for its last summer in 1967. Rationalisation began in September 1977: one side of the island platform was abandoned and lifted, and the resulting land is now a station car park. The station canopy, a fine piece of Great Western glass-and-iron work, survived intact until late 1979 when some of its glazing fell out. Rather than repair it, the British Railways engineers shortened it in early 1980 to the small section that still covers the concourse. Both signal boxes were removed in 1977; one survives, repurposed as a ground frame controlling the loop points where engines run round their trains.

Today the station is unstaffed. The ticket machine is on the train; the station building, an attractive piece of mid-Victorian railway architecture, has been let to a cafe and coffee shop on one side and serves as covered waiting accommodation on the other. Step-free access reaches all the way from the main entrance to the platform. Transport for Wales runs services roughly every two hours on weekdays, Monday to Saturday, and five trains in each direction on Sundays. They run the full length of the Cambrian Coast line south to Aberystwyth and east through Machynlleth and Shrewsbury, the link to the main British network maintained by a single set of rails. The line has had its modern crises (in November 2013 services were suspended for ten months when the 1867 Pont Briwet wooden viaduct shifted during construction of its replacement) but it has always come back. A long siding run-round on the old doubled section is occasionally still used by visiting steam charters, and on those days the station fills, briefly, with the smoke and noise of how Pwllheli once worked.