The Whitley was designed by John Lloyd, the Chief Designer of Armstrong Whitworth Aircraft to meet Air Ministry Specification B.3/34 issued in 1934 for a heavy night bomber. The AW.38 design was a development of the Armstrong Whitworth AW.23 bomber-transport design that had lost to the Bristol Bombay for specification C.26/31, partly due to its Armstrong Siddeley Tiger engines. The Whitley carried a crew of five and was the first aircraft serving with the RAF to have a (semi-)monocoque fuselage, using a slab-sided structure which eased production. As Lloyd was unfamiliar with the use of flaps on a large heavy monoplane, they were initially omitted. To compensate, the mid-set wings were set at a high angle of incidence (8.5°) to confer good take-off and landing performance. Although flaps were included late in the design stage, the wing remained unaltered. As a result, the Whitley flew with a pronounced nose-down attitude, resulting in considerable drag. This "nose down" attitude was also seen in the design of the Armstrong Whitworth Ensign pre-war airliner.
The first prototype Whitley Mk I (K4586) flew from Baginton airfield on 17 March 1936, piloted by the Armstrong Whitworth Chief Test Pilot Alan Campbell-Orde and was powered by two 795 hp (593 kW) Armstrong Siddeley Tiger IX radial engines. The second prototype was powered by more powerful Tiger XI engines. Owing to the urgent need to replace biplane heavy bombers in service with the RAF, an order for 80 aircraft had been placed in 1935, "off the drawing board". These had medium-supercharged engines and manually operated, drum magazine single machine guns fore and aft. After the first 34 aircraft had been built, the engines were replaced with more reliable two-stage supercharged Tiger VIIIs, resulting in the Whitley Mk II, that completed the initial order. One Whitley Mk II, K7243, was used as a test bed for the 1,200 hp 21-cylinder radial Armstrong Siddeley Deerhound engine, first flying with the Deerhound on 6 January 1939. The replacement of the manually operated nose turret, with a powered Nash & Thomson turret and a powered retractable two-gun ventral "dustbin" turret, resulted in the Whitley Mk III. The turret was hydraulically powered but it was hard to operate and added considerable drag.
While the Tiger VIIIs used in the Whitley Mks II and III were more reliable than those used in early aircraft, the Whitley was re-engined with Rolls-Royce Merlin engines in 1938, giving rise to the Whitley Mk IV. The new engines produced greatly improved performance and the decision was made to introduce a series of other minor improvements to produce the Whitley Mk V. The fins were modified, leading edge de-icers were fitted, manually operated tail and retractable ventral turrets were replaced with a Nash & Thompson powered turret equipped with four .303 in (7.7 mm) Browning machine guns and the rear fuselage was extended by 15 in (381 mm) to improve the field of fire. The Mk V was the most numerous version of the Whitley, with 1,466 built until production ended in June 1943.
Early marks of the Whitley had bomb bay doors—the eight bays were in fuselage compartments and wing cells—that were held shut by bungee cords and opened by the weight of the bombs as they fell on them. The short and unpredictable delay for the doors to open led to highly inaccurate bombing. The Mk.III introduced hydraulically actuated doors which greatly improved bombing accuracy. To aim bombs, the bomb aimer opened a hatch in the nose of the aircraft, which extended the bomb sight out of the fuselage but the Mk IV replaced this hatch with a slightly extended transparency, improving crew comfort. The bomb aimer position was in the nose with a gun turret above. The pilot and second pilot/navigator sat side by side in the cockpit. The navigator rotated to use the chart table behind and the wireless operator was further back. The fuselage aft of the wireless operator was divided horizontally by the bomb bay. Behind the bomb bay was the main entrance and aft of that the rear turret.