From west to east, the route of the canal was to follow Swatara Creek upstream from Middletown to Quittapahilla Creek, which it then followed upstream past Lebanon and Myerstown to its headwaters. It then crossed overland to Clarks Run at the headwaters of Tulpehocken Creek, following Tulpehocken Creek downstream to Reading on the Schuylkill River. It was to follow the Schuylkill downriver to the Delaware River at Philadelphia.
Construction began in 1792 under the direction of William Weston, an experienced British canal engineer. The first shovel of earth was turned by President George Washington. By 1793, several miles of the canal were dug and five locks were built between Myerstown and Lebanon before financial difficulties caused the work to cease. In 1795 the Pennsylvania Legislature authorized a lottery to raise funds for the canal's construction. The largest canal lottery in U.S. history, it held 50 drawings over the next two decades, awarding $33 million in prize money, with only $270,000 reaching the canal companies.
In 1811 the two canal companies were reorganized and merged as the Union Canal Company of Pennsylvania. Construction resumed in 1821. One of the principal challenges was the construction of a 729 ft (222 m) tunnel through the ridge separating the headwaters of Quittapahilla Creek and Clarks Run. The drilling of the tunnel was by hand, using gunpowder to blast though argillaceous slate with veins of hard flinty limestone 80 feet (24 m) below the summit of the ridge. The progress of the tunnel was approximately 15 ft (4.5 m) per week, requiring over two years to complete. Another engineering difficulties was the continual resupply of water at the summit level, a task that was compounded by leakage and required an elaborate pumping mechanism.
Although the initial design called for the construction of a canal from the Susquehanna to the Delaware, the 1825 opening of the rival Schuylkill Navigation from Reading to Philadelphia prompted the Union Canal Company to focus solely on the Middletown-Reading portion of the canal.
The canal was completed in 1828 under the direction of Canvass White, the preeminent canal engineer of the day. Upon its completion it was 8-1/2 ft (2.6 m) wide and had 93 locks. In 1832 a 22 mi (35 km) branch canal was constructed northward from the water works along the Swatara Creek to Pine Grove. The branch canal served as feeder for the summit level as well as allowing the transport of anthracite from the mountains, which became a principal revenue source for the canal operation.
By the 1840s the narrow size of the canal locks prevented the passage of the larger barges that were adopted for use on the Pennsylvania Main Line and Schuylkill Navigation. The existing width restricted barges to . From the 1841 to 1858, under the direction of chief engineer Loammi Baldwin, Jr., the canal was widened to 17 ft (5.2 m) to allow the passage of the larger boats carrying to . In the process of the rebuilding, the tunnel through the summit ridge was shortened to 600 ft (180 m). The widening of the canal allowed for a brief period of prosperity in the late 1850s and early 1860s.
In June 1862 a flood on Swatara Creek damaged the western portion of the canal, completely destroying the Pine Grove feeder upon which the canal company depended for revenue. The flood prompted costly repairs that were compounded with continual water supply problems. The connecting railroad was leased to the Philadelphia and Reading Railroad on July 26 1862, and sold outright in January 1866. The completion of the Lebanon Valley Railroad in 1857 from Reading to Harrisburg cut into the canal revenues, forcing its closure in 1881.
A restored portion of the canal along Tulpehocken Creek is maintained by the Berks County Parks System at the Union Canal Towpath Park in Wyomissing west of Reading. A portion of the canal along Swatara Creek is also preserved at Swatara State Park.