As part of the Carolinian archipelago, the islands were sighted by European navigators as early as the 16th century. In 1686, the Spanish explorer Francisco Lezcano named Yap Island (now in the Federated States of Micronesia) "La Carolina" after King Charles II of Spain. The name was later generalized to include all the islands. Spanish sovereignty was established in 1885. In 1899, after Spain's defeat in the Spanish-American War of 1898, Palau, with the rest of the Carolines, was sold to Germany. At the outbreak of World War I in 1914, the islands were taken by the Japanese. As a member of the League of Nations, Japan was given a mandate over Palau in 1920, and Koror was developed as an administrative center of Japanese possessions in the north Pacific.
In 1947, following occupation by US forces in World War II, Palau became part of the UN Trust Territory of the Pacific Islands, which was administered by the United States. After the adoption of a constitution in 1980, Palau became a self-governing republic in 1981. Since 1982, the republic has been involved in negotiating a Compact of Free Association (CPA) with the United States. Negotiations were stalled because the 1980 constitution prohibits any placement of nuclear weapons, and the United States has wanted to use the islands as a military site. In June 1985, President Haruo Remeliik was assassinated; Vice-President Alfonso Oiterang served as acting president until August 1985, when he was defeated in an election by Lazarus E. Salii. President Salii committed suicide in August 1988. Kuniwo Nakamura was elected president in November 1992. On 1 October 1994 Palau became an independent nation in free association with the United States; under the CPA the United States is responsible for Palau's defense. In 1995, Palau entered into diplomatic talks with the United States, Japan, and Taiwan. In February 1999, Palau opened an embassy in Tokyo, Japan.
Under the 1994 CPA, Compact funds were allocated to finance the building of roads and infrastructure on Babelthuap, across from the capital Koror, in order to attract people and economic activity. As of 1999, despite President Nakamura's support, Paramount Chief Ibedul Yutaka Gibbons of Koror, the most powerful traditional leader in Palau, opposed the Compact and its channeling of resources away from Koror and to Babelthuap, arguing the Compact will erode Palau's autonomy and threaten traditional values.
In March 1999, a strong movement emerged in the Palau Congress to change the existing bicameral congress (House of Representatives and Senate) to a unicameral form of government to reduce the cost of government. As of early 2003, the congress remained bicameral.
In July 1999, Palau hosted the First Micronesian Traditional Leaders' Conference. In October 1999, Palau hosted the 30th South Pacific Forum with more than 300 foreign delegates, observers, and media members. The Forum considered issues on climate and sea level change, regional security and law enforcement, fisheries, and the United Nations Special Session on Small Island Developing States. Trade ministers of the South Pacific Forum endorsed the proposal for a Pacific Free Trade Area (FTA) that would create a regional market of six million people. The FTA allows goods produced in the fourteen island countries to be traded freely.
Tommy E. Remengesau, Jr. was elected president in general elections held 7 November 2000; Sandra Pierantozzi became the first woman vice-president.