In 1932, the Ordnance Department (Heereswaffenamt) issued a specification for the construction of a "freight aircraft for German State Railways", and a "high speed mail plane for Lufthansa". The factory at Friedrichshafen began work on the design on 1 August 1932.
When the Nazis took power in 1933, Hermann Göring became National Commissar for aviation with former Deutsche Luft Hansa employee Erhard Milch as his deputy, soon forming the Ministry of Aviation. The Ministry of Aviation designated the new aircraft Do 17, and on 17 March 1933, just three months after taking office, Milch gave the go ahead for the building of prototypes. At the end of 1933, the Ministry of Aviation issued an order for a "high speed aircraft with double tail," and for a "freight aircraft with special equipment," in other words, a bomber. The original design (the Do 17 V1) configuration in 1932 had sported a single vertical stabilizer, and Dornier continued developing that model. The Do 17 was first demonstrated in mock-up form in April 1933. The "special equipment" was to be fitted later, to disguise its offensive role.
In April 1934, the Dornier works at Manzell began project "definition." During this month, the defensive armament was designed and the bomb release mechanism details ironed out. Production of these prototypes began on 20 May 1934 and, on 23 November 1934, the Do 17 V1, with a single fin and powered by two BMW VI 7.3 motors, took off on its first flight. Testing was delayed by a series of accidents, with V1 being damaged in landing accidents in February and April 1935. The twin-tailed V2 (powered by low-compression BMW VI 6.3 engines) first flew on 18 May 1935 and was evaluated together with the V1 by the Ministry of Aviation at Rechlin in June. During the tests, the single fin proved to be only marginally stable, resulting in the V1 being modified with a twin tail. The aircraft was destroyed in a crash after an engine failure on 21 December 1935. The V3, also fitted with a twin tail, was originally planned to be powered by Hispano-Suiza 12Ybrs engines, but as these were unavailable, it was fitted with BMW VI 7.3 engines like the V1 and flew on 19 September 1935. The V1 prototype remained the only built machine with the single stabilizer.
It is claimed that, unlike the Heinkel He 111 series, whose military use was planned from the start, the Do 17 V1 was contracted as a fast six-passenger mail plane to compete with the smaller Heinkel He 70 monoplane It has been suggested that it was rejected by Luft Hansa, as the cramped cabin was too uncomfortable for passenger use and the operating costs also were too high for a mail plane. According to the story, the three prototypes remained unused in the Dornier factory in Lowental for almost six months, until Flight Captain Untucht of Luft Hansa came across them. After receiving permission to fly one of the machines, he proceeded to put it through an almost stunt flying routine. After landing, he said that "the machine is as nimble as a fighter, give it more lateral stability and we'll have a high speed bomber!" Untucht's comments prompted Dornier to redesign the tail unit and revived interest in the type.
Dornier was then ordered to produce the V4 prototype. Some sources state this differed from the V3 in that the passenger portholes were removed and the single fin was replaced with two smaller ones. Photographic evidence demonstrates the V3 had twin stabilizers from the start of its construction. The tests of the "twin-tailed" V4, V6 and V7 prototypes were positive and more prototypes like the V8 emerged as the forerunner of the long-range reconnaissance version, while the V9 was tested as a high-speed airliner. The V9 machine was still flying in 1944.