The narrator begins the story with a description of Greensburgh, New York. It is a small town on the eastern shore of the Hudson River. This town is also known as Tarry Town, a nickname some wives have given on account of their husbands "tarrying" (lingering) at local taverns.
Two miles from town lies a valley (Sleepy Hollow). The narrator describes it as "one of the quietest places in the whole world." The narrator remarks that it would be the perfect place to escape from life's distractions. But he adds that there is something mysterious about the valley. He says that "a drowsy, dreamy influence seems to hang over the land." There are rumors that the land was bewitched by a German doctor and/or the land is the former site of an Indian wizard's powwows. The people in the neighboring town have had plenty of odd experiences and have many stories to tell about the allegedly bewitched land. The legend of the headless horseman is the most prominent tale of Sleepy Hollow. The narrator adds that anyone who spends some time in Tarry Town and/or Sleepy Hollow will fall under its dreamy spell. While some of the other areas of the country (and New York City in particular) are undergoing change, this area has remained relatively the same. It's as if to say, it is stuck in the past. This notion goes along well with the idea of the continuing traditions and legends of the valley.
Another piece of the setting is Old Baltus Van Tassel's farm and farm house. It is extravagant as farms go. Ichabod Crane is as enamored with it as he is with Katrina. He came to regard the Van Tassel estate like a castle with Katrina as the princess and object of his affection. Only Brom Bones (and the Hessian) will stand in his way.
The bridge represents the division between the material world and the world of the supernatural. Crane's only hope to escape the Horseman is to reach the bridge. The bridge is also symbolic of the town's culture, being quaint and realistic but also connected (bridging) to legends and stories of the supernatural.