In early 1937, the Reichsluftfahrtministerium (German Ministry of Aviation) issued a specification for a carrier-based torpedo bomber to operate from Germany's first aircraft carrier, the Graf Zeppelin construction of which had started at the end of 1936. The specification was issued to two aircraft producers, Fieseler and Arado, and demanded an all-metal biplane with a maximum speed of at least 300 km/h (186 mph), a range of at least 1,000 km (631 mi) and capable both of torpedo and dive-bombing. By mid-1938 the Fiesler design proved to be superior to the Arado design, the Ar 195.

The aircraft exceeded by far all requirements, had excellent handling capabilities and could carry about twice the required weapons payload. Like the company's better known Fieseler Fi 156 Storch, the Fi 167 had surprising slow-speed capabilities; under the right conditions, the plane would be able to land almost vertically on a moving aircraft carrier. During a test flight, Gerhard Fieseler himself let the plane drop from 3,050 to 30 metres (10,000 to 100 ft) while staying above the same ground point.

For emergency landings at sea the Fi 167 could jettison its landing gear, and airtight compartments in the lower wing would help the aircraft stay afloat at least long enough for the two-man crew to evacuate.

Two prototypes (Fi 167 V1 and V2) were built, followed by twelve pre-production models (Fi 167 A-0) which had only slight modifications from the prototypes. Its only combat use was with the Croatians in late 1944/early 1945 where one is reputed to have shot down an attacking Mustang.