At E3 2018, it was initially confirmed that The Last of Us Part II would feature a multiplayer mode, following the Factions online multiplayer mode featured in The Last of Us that received more uniformly positive praise from fans and critics compared to the main game. However, in September 2019, the same month the PlayStation 3 servers for the original Factions mode were shut down, it was revealed that Part II would solely focus on a single-player narrative, and that development on the multiplayer mode had been spun-off from the main game to continue work separately. Throughout 2020 and 2021, Naughty Dog increased job openings related to the multiplayer mode's development and continued seeking out additional staff to work on it, implying that it had increased in scope to a full game.

At Summer Game Fest 2022, Neil Druckmann showed off the game's first piece of concept art and confirmed that they were working on it as its own game, revealing that the team's ambitious scope had caused it to be "as big" as the single-player modes. The game would feature its own storyline that would be told in a unique way compared to the previous two games, take place in a new location in the United States (presumably San Francisco based on the art featuring the South of Market neighborhood and the San Francisco-Oakland Bay Bridge), and feature brand new characters.

The development of the game, which was later revealed in 2023 to be named "The Last of Us Online", was led by co-game directors Anthony Newman and Vinit Agarwal, and narrative lead Joseph Pettinati. Starting with the Summer Game Fest appearance, Druckmann reiterated that more details on the game would be revealed in 2023, and shared a second piece of concept art in January of that year.

In May, it was revealed in a Bloomberg article that Sony had scaled back development on the game and moved many of its developers to other projects, with Naughty Dog putting out their own statement on Twitter shortly after the article's release which revealed that they "realized what's best for the game is to give it more time." As a result of Sony's more recent heavy investments into "games as a service" (GaaS) products in an attempt to centralize control over and make more money on its games after release, they requested Bungie, a studio which Sony had recently acquired in July 2022, to re-evaluate the game. Bungie questioned its ability to maintain player engagement for long periods of time, which was ultimately what caused Sony to intervene.

According to Naughty Dog in a December 2023 blog post, the entire time since the multiplayer mode was first being worked on for The Last of Us Part II in 2018, The Last of Us Online had still been in pre-production, with the multiplayer developers' vision changing and taking time to form into something they were more satisfied with. With Sony's GaaS investments affecting the game, if they wanted to put the game into full production, they would need to take all of their resources away from the single-player games they had become known for and switch to a fully live service model with the ability to put out long-term post-launch content updates.

After Naughty Dog co-president Evan Wells retired in July, the company faced an internal restructuring, eventually leading to at least 25 contracted developers being laid off from Naughty Dog's staff in October, contributing to a wave of layoffs across the video game industry at the time. With a reduced, restructured workforce and other major upcoming single-player projects at the helm, Naughty Dog was inequipped to become a live service studio, and announced in December that they cancelled the development of The Last of Us Online after more than three years of work.