In 973, Škofja Loka was granted by Emperor Otto II to the Bishops of Freising. A castle and tower were built above the town for defense purposes in the 11th or 12th century. Emperor Otto III granted the bishops the right to mint coinage and collect tolls. Škofja Loka was first mentioned as having market rights in 1248, and having town rights in 1274.
Škofja Loka was walled in the 14th century. In 1457, Duke Jan Vitovec entered and burned the town. The town was attacked by the Ottomans in 1476. The town also suffered from plague and fires during this time. Peasant revolts occurred in Škofja Loka in 1488, 1492, and 1515. Škofja Loka was destroyed by an earthquake in 1511 but soon rebuilt through the efforts of Bishop Phillip. Lutheranism was established in Škofja Loka in 1526. Laws were passed against the new religion, and a Counter-Reformation committee was convened at the castle in 1601, resulting in the burning of Protestant books.
Much of the town was damaged by fires in 1660 and 1698. The defensive walls gradually became obsolete and were mostly removed together with the town gates in 1789.
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