The origins of the square date back to the fifteenth century, when the confluence of roads (streets today) of Atocha Toledo, just outside the medieval village, was held on this site, known as "Plaza del Arrabal" , the main market of the town, built at this time a first home arcades, or auction, to regulate trade in the square.

In 1580, having moved the court to Madrid in 1561, Philip II commissioned the project to remodel the plaza Juan de Herrera, starting the demolition of the "apple house" of the former place that year. The construction of the first building of the new square, the Casa de la Panaderia, beginning in 1590 by Diego Sillero, on the site of the former fish market. In 1617, Philip III, ordered the completion of the works of Juan Gomez de Mora, who completed the square in 1619.

The Plaza Mayor has suffered three major fires in its history, the first one in 1631, taking charge the same Juan Gomez de Mora of the reconstruction work. The second fire occurred in 1670 being the architect Tomás Román in charge of reconstruction. The last of the fires, which destroyed one third of the square, took place in 1790, directing the firefighters Sabatini. Reconstruction was entrusted to Juan de Villanueva, which lowered the height of the houses surrounding the plaza from five to three plants and closed corners enabling large arches for access. The reconstruction work continuing until 1854, which continued after Villanueva´s death, his disciples Antonio Lopez Aguado and Custodio Moreno.

In 1848, he placed the equestrian statue of Felipe III in the center of the square, the work of Giambologna and Pietro Tacca dating from 1616.