IU published her fourth studio album, Palette, on April 21, 2017, of which she served as the primary lyricist and executive producer. Three singles from the album were released earlier; the lead single of the same name featuring G-Dragon from BIGBANG; as well as two pre-release tracks "Through the Night" and "Can't Love You Anymore". Palette (팔레트) debuted atop Billboard World Albums chart, a first for the singer, and topped local charts in both album sales and downloads. Palette was a commercial success, with all three singles from the album peaking at the top of the Gaon Digital Chart, with the main single, "Palette" spending a total of two weeks at number 1. However, it was her first pre-release track, "Through the Night" that became the best-selling track from the album and also her best-selling single of 2017.

Palette was also critically acclaimed and received multiple accolades, including "Best Pop Album" at the 15th Korean Music Awards, "Album of the Year" at the Melon Music Awards, and "Record of the Year (Album)" award at the 27th Seoul Music Awards;] IU herself was awarded the Best Female Artist at the Mnet Asian Music Awards. The album also earned IU a "Best Songwriter" award at the Melon Music Awards, a "Lyricist of the Year" award at the seventh Gaon Chart Music Awards and a "Producer of the Year" award for herself and her production team. IU also received the "Song of the Year" award at the 32nd Golden Disc Awards for her hit song "Through the Night". Billboard magazine listed "Palette" at number six on its list of "Best K-Pop Songs of 2017." The New York Times Magazine also featured "Palette" on its list of "25 Songs That Tell Us Where Music Is Going", making IU the only Asian artist to make the list while appreciating IU's ability as a singer-songwriter to project authenticity in K-pop. Furthermore, Billboard ranked Palette the best K-pop album of 2017, explaining that "An album as impressive and sonically diverse as Palette proves why injecting an artist's personal experiences into their music can lead to their greatest work yet."

IU released her second cover album, A Flower Bookmark 2 on September 22, 2017. Prior to the album's release, a single titled "Autumn Morning" was released without prior notice on September 18 to mark the singer's ninth anniversary. She later went on a tour in various cities around Korea as well as Hong Kong from November to December 2017 to promote the album. IU was also featured in the title song, "Love Story", of Epik High's ninth album, We've Done Something Wonderful, which was released on October 23, 2017. Gallup Korea ranked her the most popular K-pop artist of 2017 (she previously topped the ranking in 2014) and also the most popular K-pop idol of the year.

In March 2018, IU starred in tvN's My Mister, playing the character Lee Ji-an. The series was commercially and critically successful with peak audience ratings of 7.3% making it one of the highest rated Korean dramas in cable television history, and positive reviews for IU's performance. IU then contributed her vocals to Zico's "Soulmate", which was released on July 23, 2018. Upon release, the single topped the daily and real time charts of all 6 major Korean music sites and claimed the number-one position on the Gaon Digital Chart.

To commemorate her tenth debut anniversary, IU released a single titled "Bbibbi" on October 10, 2018. The song surpassed one million unique listeners on Korea's largest music site, Melon, only 16 hours after its release, and by 23 hours in, it broke the previous 24-hour unique listener record set by her duet "Leon" with Park Myung-su in 2015. "Bbibbi" went on to record a total of 1,462,625 unique listeners in the first 24 hours of its release. The single peaked at number one on the Gaon Digital Chart, and at number five on the Billboard's World Digital Songs Chart. Billboard magazine listed "Bbibbi" at number 87 on its list of "Best Songs of 2018", explaining "The single not only comments on IU's experiences in the public life, but it doubles as a universal empowerment anthem, knowing and acknowledging one's worth and personal rights."] The single was also listed at number 4 on Billboard's list of "The 20 Best K-pop Songs of 2018". IU began her first Asian tour, titled IU 10th Anniversary Tour Concert, on October 28, 2018. Two months later, IU featured on Kim Dong-ryul's "Fairytale", which peaked at number four on the Gaon Digital Chart.