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Through European people, World War II and De facto and de jure

Palau was likely sighted for the first time by Europeans as early as 1522, when the Spanish mission of the Trinidad, the flagship of Ferdinand Magellan's voyage of circumnavigation, sighted two small islands around the 5th parallel north, naming them "San Juan" without visiting them.

Palau was subsequently discovered by the Europeans on 28 December 1696 when the first map of Palau was drawn by the Czech missionary Paul Klein based on a description given by a group of Palauans shipwrecked on the Philippine coast on Samar. This map and a letter sent to Europe by Klein in June 1697 had a vast impact on interest in Palau. It resulted in the first Jesuit attempts to travel to the islands from the Philippines in 1700, 1708 and 1709, which failed to establish missions. The islands were then visited by the Jesuit expedition led by Francisco Padilla on 30 November 1710, who left two priests Jacques Du Beron and Joseph Cortyl stranded on the coast of Sonsorol, while the mother ship Santissima Trinidad was swept away by a storm. Subsequent attempts to save Du Beron and Cortyl revealed that they were killed and eaten by the locals.

British traders became prominent visitors in the 18th century, followed by expanding Spanish influence in the 19th century; the Palau islands were made part of the Spanish East Indies in 1885. After its defeat in the Spanish–American War in 1898, Spain sold Palau and most of the rest of the Caroline Islands to Germany in 1899 under the terms of the German–Spanish Treaty, with the Palauan islands administered as part of German New Guinea. Control passed to Japan during World War I. In the course of World War II the islands were taken by the United States in 1944. The Battle of Peleliu between September 15 and November 25, 1944, was hard fought, with 2,000 Americans and 10,000 Japanese killed. The islands passed formally to the United States under United Nations auspices in 1947 as part of the Trust Territory of the Pacific Islands.

Four of the Trust Territory districts formed a single state, the Federated States of Micronesia, in 1979, but the districts of Palau and the Marshall Islands declined to participate. Palau, the westernmost cluster of the Caroline Islands, instead opted for independent status in 1978, approved a new constitution and became the Republic of Palau in 1981, and signed a Compact of Free Association with the United States in 1982. After eight referendums and an amendment to the Palauan constitution, the Compact was ratified in 1993 and went into effect on October 1, 1994, marking Palau independence de jure (after Palau was independent de facto since May 25, 1994, when the trusteeship was cancelled).

Legislation making Palau an "offshore" financial center was passed by the Senate in 1998. In 2001, Palau passed its first bank regulation and anti-money laundering laws.

Archaeology

Carbon dating of cave burials show a pygmy population, presumably the result of insular dwarfism, from at least 3,000, and perhaps as long as 4,500 years ago until about 900 years ago (1000–2500 BC until ca. 1100 AD).

Evidence for early occupation in Palau comes from several loci scattered across the archipelago. Unfortunately, the earliest radiocarbon dates are not from clear contexts and thus provide little data on the early occupations. The earliest acceptable dates for Palau are from the 1st century and 2nd century A. D. Dates from the 1st and 5th century come from midden deposits on Kayangel. The earlier date is from tridacna shell from a deposit which may lie beneath the lowest cultural deposit. The shell is not associated with other artifacts and it is not clear if nearby artifacts are from a permanent occupation of the atoll. The 5th century date is associated with other artifacts, but it is still not clear if this part of the midden derives from a permanent occupation. In another study, Osborne obtained a date of A. D. 161 from excavations at the Badrulchau Site. The date is from a composite charcoal sample in a level under the stone pillar structure and apparently underlying the terracing on the hillside.

The construction and maintenance of terraces on the volcanic islands appears to precede the formation of the formal, nucleated, settlements observed at European contact in 1783. Furthermore, there is evidence of an intensification in the construction of terraces at the start of the second millennium. At about the same time as intensification of terrace construction on the volcanic islands, evidence from the rock islands suggests an increasing nucleation of settlements.

Although many terrace systems are found on the hills ringing the volcanic islands, and possibly even some terraces in the rock islands, it has proven difficult to obtain solid chronological data on these. The variety of different forms of terraces and special features associated with terraces such as "crown and brim " elaborations " suggest that the terraces functioned in different ways. The location and organizational characteristics of habitations associated with terraces appear to have been, to some extent, different than that of the historic pattern of traditional villages in coastal areas. At present, information on associations between the terraces and earlier habitation sites is lacking. Radiocarbon dates associated with terracing range from 491 to 1810. Most of the dates associated with terraces fall between 895 and 1165. The most recent date, 1810, is from a shell midden eroding out of the face of a terrace; the midden was apparently buried in the continuing building of the terrace.

The earliest date associated with cultural material from the rock islands is 620 from the Uchu larois Cave Site, followed by three dates in the 630s from the Mariar Site on Ngeruktabel Island and the Ngidech Beach Site on Ulebsechel Island. Some of these middens, especially from the Uchularois Cave Site, contain large quantities of artifacts, suggesting that they are the result of the intensive exploitation of marine resources, shellfish in particular.

Later data from rock island sites suggest important changes in the settlement system with the development of nucleated villages. Evidence from legends and the tight clustering of the radiocarbon dates suggests that the villages were abandoned abruptly early in the 15th century. However, there is evidence of continued exploitation of resources in the rock islands after the abandonment of the villages. There are five dates from rock island sites in clear association with structures, and these dates range from 1200 to 1420. These dates, together with the size and complexity of village sites in the rock islands, suggest that these villages were permanently occupied during this time. It is probable that permanently occupied villages developed before 1200. There are four dates from middens in rock island sites ranging from 1345 until 1950. These latter four dates are not in association with structures, however.

The formation of the village systems observed historically appears to reflect a major transformation in Palauan society. The archaeological village sites on the volcanic islands are organized the same as the villages recorded historically by Keate (1789), Semper (1873), Kubary (1889), and Krämer (1919). The recorded village sites consist of clusters of features indicating the integration of domestic and community activities. The large stone features recorded in village sites have specific historic references in the oral tradition of Palau. These facts suggest that the village organization we see today evolved in the 14th and 15th centuries. By the end of the 16th century, the social system we see reflected in modern villages was largely in place.

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