The canal was the personal project of John Hamilton, 1st Marquess of Abercorn. Most of the land between Strabane and the tidal waters of Lough Foyle at Leck was within his estates, and the Marquess believed a canal would encourage industrial and commercial development in his town. He obtained an Act of Parliament in 1791 authorizing the construction. His agents bought the necessary land by agreement with the owners - a striking departure from the compulsory purchase that became standard for later canals and railways. The total cost came to 11,858 pounds, privately funded by the Marquess, supplemented by a loan of 3,703 pounds from the Irish Parliament. The canal opened in 1796 - the year of Wolfe Tone's first attempted French invasion - and ran from the Foyle just above its junction with the Burndennet River, through two locks called Crampsie's Lock and Devine's Lock, all the way up to Strabane. Water flowed in from a burn above Devine's Lock. The whole 6.4-kilometre line worked exactly as planned.

From 1820, a group of local people leased the canal from the young 2nd Marquess of Abercorn - later to become the 1st Duke of Abercorn - and ran it successfully for four decades. Grain was the principal trade. Lifford and Strabane both flourished as agricultural markets in the first quarter of the 19th century. Coasters from the open sea could even reach Strabane in the early years, bringing salt and iron and colonial produce, taking out hides and butter from the same Donegal hinterland that fed the Empire's appetite for everything. Warehouses lined the banks. Two saw mills, a tannery, a brewery, and repair shops clustered near the basin. Coal arrived to supply the gas works. The narrow gauge Donegal Railway, when it finally came over the canal below Strabane Basin in 1900, found itself competing with a canal that was no longer the dominant carrier. The railway and canal companies eventually agreed rates because each still offered competition to the other.

The Londonderry and Enniskillen Railway opened from Derry to Strabane in 1847. The line extended to Omagh in 1852, and a network of connecting railways soon developed. The effect on the canal was dramatic. The lease company was wound up in 1860 and replaced by the Strabane Steam Navigation Company. Traffic stayed around 20,000 tons through the end of the century, but operating costs and the lease ate most of the revenue. The net annual return was always below 300 pounds. The new company was wound up in turn and replaced by the Strabane Canal Company in 1890, with James McFarland as principal shareholder. Conditions worsened. The water was less than two feet deep along much of the canal. Over two miles of the east bank needed repairs. The lock gates leaked. Shoals developed in the Foyle below the entrance because the Derry authorities failed to dredge. The Carlisle Bridge in Derry, built in the 1860s, blocked tall coasters from reaching Strabane. Lighters could only complete the journey half-full.

Traffic on the canal ceased in the early 1930s. Attempts to abandon it formally were made from 1944. The section between Strabane and the swing bridge at Dysert was finally abandoned in 1962, though the rest officially remained open on paper. For four decades, the canal lay forgotten. Then in June 2006, the Strabane Lifford Development Commission paid for a 1.3-million-pound cross-border waterways restoration contract. President of Ireland Mary McAleese launched the project in Lifford. It intended to restore 2.4 kilometres of canal and two locks to working order. The locks were restored. The construction work on the canal channel itself, however, was of poor standard. The council subsequently refused to maintain the restored section in its current state. It has begun to deteriorate again - a peculiarly modern Irish failure of follow-through that mirrors, in a smaller way, the same loss of momentum that killed the original canal in the age of the steam engine. The lighters are gone. The grain trade is gone. The Marquess's tower of intent stands as a 6.5-kilometre line on old maps and a memory of when water moved Ireland.