Prior to European settlement, only a few Indians lived in what is now Uruguay. Juan Díaz de Solís, a Spanish explorer, discovered the Río de la Plata in 1516 and was the first European to land on the Banda Oriental (eastern bank), as Uruguay was initially called. Lacking precious metals, the region did not attract many colonists. Spanish missionaries, however, came in 1624.

In the early 18th century, the Spanish in Argentina sent settlers to Uruguay to keep the Portuguese of Brazil from settling the region. Montevideo was founded in 1726. Uruguay was ruled at first from Lima, Peru, as part of the Viceroyalty of Peru, and later from Buenos Aires, Argentina, as part of the Viceroyalty of La Plata.

Under José Gervasio Artigas, the Uruguayans in 1815 declared their region independent of Argentina. In 1820, however, Uruguay was conquered by Brazil. A new independence movement, assisted by the Argentines, was launched in 1825, touching off war between Brazil and Argentina. Although both powers coveted Uruguay, British mediation resulted in an agreement that gave Uruguay independence in 1828. In 1830, the country became a republic with José Fructuoso Rivera as president.

Six years later civil war broke out between two factions—the Blancos (Whites), led by President Manuel Oribe, and the Colorados (Reds), under Rivera. Again the Brazilians and Argentines intervened in the country—Argentina supporting Oribe and Brazil supporting Rivera. For nine years while the Colorados were in control of the government, 1843–51, the capital city of Montevideo was besieged by the Blancos and Argentines. In the 1850's and 1860's Brazilian troops helped keep the Colorados in power. Outside intervention eventually ceased, but internal turmoil continued.

José Batlle y Ordóñez of the Colorado party served as president, 1903–07 and 1911–15. His social, economic, and political reforms created political stability and laid the foundation for Uruguay's becoming a welfare state. Batlle negotiated an end to the open warfare between the Colorados and the Blancos and created a strong democratic state. He expanded the public educational system into rural areas and nationalized the utilities. Batlle's successors broadened the government's control over the economy and extended welfare benefits to include free medical care, unemployment insurance, and low-cost housing.

A new constitution adopted in 1919 reflected Batlle's desire to remodel the government; it created an administrative council to share responsibility with the president so that all political interests could be represented in the executive branch. When economic depression set in during the early 1930's, President Gabriel Terra (1933–38) felt the council was an obstruction to much-needed economic reform. He abolished the council, assumed dictatorial powers, and secured adoption of a new constitution. In 1952, however, the constitution was revised to replace the office of president with an executive council.

By the 1950's, Uruguayans enjoyed one of Latin America's highest standards of living. But during the next decade the spiraling costs of the country's welfare programs resulted in economic difficulties, and by 1965 the country was close to bankruptcy. The following year Uruguayans voted to restore presidential government. Austerity measures imposed to aid the economy resulted in strikes and rioting.

Urban violence increased, and in 1973 the army took control of the country. Although promising to hold free elections, the military rulers repressed all dissent. In 1981, faced with growing popular discontent, the military government negotiated with the Colorado and Blanco parties concerning a return to civilian rule. Elections were held in 1984, and Colorado candidate Julio Sanguinetti was elected president. A revised constitution was approved in 1985. Uruguay faced economic difficulties in the 1980's, including high inflation and unemployment. Sanguinetti could not by law succeed himself, and a third-party candidate won election in 1989. Sanguinetti was returned to office in 1994.

In 1999, the presidency was won by Jorge Barlle Ibanez of the Colorado Party. During the late 1990's and early 2000's, an economic crisis occurred in Uruguay, partially because of financial difficulties in the neighboring countries of Argentina and Brazil.

The November, 2004, presidential election was won by Tabare Ramon Vazquez Rosas of the Socialist Party. Vazquez became Uruguay's first elected leftist president.