down the preposition and down "an open expanse of elevated land" used to be the same word: Old English dūn "hill". Of dūne meant "off the hill or height", and this became the modern preposition down.
The AHD has the Proto-Indo-European root being *dʰeuh₂- "to close, finish, come full circle". This became *dʰuh₂-no- "enclosed, fortified place; hill-fort", then Old English dūn "hill".
town is from Old English tūn from Proto-Germanic *tūnaz- "fortified place". The German cognate is Zaun "fence, hedge; enclosed place". The AHD and Pokorny claim that Proto-Germanic *tūnaz- was borrowed (and shifted via Grimm's Law) from Celtic *dūnon "hill, stronghold" (as in Old Irish dún "fortress"), which is from PIE *dʰeuh₂-.
And that's how down and town might be related.