During an archaeological salvage dig conducted near the Shuafat refugee camp in preparation for the laying of the tracks for the Jerusalem Light Rail system, the remains of an ancient Roman-Jewish settlement, dating back to the Roman Empire were discovered. The settlement was described as a 'sophisticated community impeccably planned by the Roman authorities, with orderly rows of houses and two fine public bathhouses to the north.' The findings are said be the first indication of an active Jewish settlement in the area of Jerusalem after the city fell in 70 CE. The main indication that the settlement was a Jewish one is the assemblage of stone vessels found there. Such vessels, for food storage and serving, were only used by Jews because they were believed not to transmit impurity. Archaeologists believe stone basins discovered at the site were used to hold ashes from the destroyed Temple.
The town of Shuafat was to be the most northernmost point of the corpus separatum proposed in 1947 for Jerusalem and its surrounding villages, which "in view of its association with three world religions" was to be "accorded special and separate treatment from the rest of Palestine and should be placed under effective United Nations control".
After the 1948 Arab-Israeli war, Shuafat was occupied by Jordan, which annexed the West Bank and East Jerusalem. Construction of the Shuafat refugee camp began in 1964 by the UN, to alleviate the crowded conditions in the Askar camp. Construction was completed in 1966. Upon completion, the Red Cross, on orders of King Hussein, transferred the Arab refugees, originally from Ashkelon and West Jerusalem, who had settled in the hovels of the burnt out Jewish Quarter of the Old City of Jerusalem, to the camp. According to David Bedein, the wholesale transfer was ordered because Jordan intended to undertake an Arab-style renovation of the Jewish Quarter, but the plan became obsolete when in the aftermath of the Six Day War, the West Bank and East Jerusalem were occupied by Israel. The town of Shuafat and the refugee camp were subsequently annexed by Israel into the municipal area of Jerusalem,, though recently Prime Minister Ehud Olmert has questioned whether the annexation of areas like Shuafat into the Jerusalem area was necessary Residents of Shuafat were offered Israeli citizenship, but most refused it, considering themselves to be illegally occupied, though many accepted permanent residency status instead.
Three stations of the First 'Red' Line of the Jerusalem Light Rail will be situated in Shuafat: Shuafat North, Shuafat Central and Shuafat South.
According to Isabel Kershner of the New York Times, Shuafat, like most of the other Arab neighborhoods in Jerusalem, suffers from an absence of municipal planning, overcrowding, and potholed roads. While the Shuafat refugee camp is located inside Jerusalem and its residents carry Jerusalem identity cards, the camp itself is largely serviced by the United Nations Relief and Works Agency, even though 40 - 50% of the camp's population are not registered refugees. Some health services are provided by Israeli clinics in the camp, but in general the Israeli presence in the refugee camp is limited to checkpoints controlling entry and exit and Border Police incursions. In addition, unlike other UN-run refugee camps, residents of Shuafat refugee camp pay taxes to the Israeli authorities.
In a survey conducted as part of the research for the book Negotiating Jerusalem (2000), it was reported that 59% of Israeli Jews supported redefining the borders of the city of Jerusalem so as to exclude Arab settlements such as Shuafat, in order to ensure a "Jewish majority" in Jerusalem.
In July 2001, the Israeli authorities destroyed 14 homes in Shuafat on the orders of then mayor Ehud Olmert, who said the structures were built without procuring permits. 12 of the structures razed were empty, and 2 had families living in them. The families acknowldged they do not own the land the built on. Palestinians claim it is nearly impossible to get a permit and that such actions form part of a campaign to reduce the Arab population of Jerusalem.