The city was founded on March 1, 1565, by Portuguese knight Estácio de Sá, who called it São Sebastião do Rio de Janeiro (St Sebastian of the January River), in honour of Saint Sebastian (day of death traditionally on January 20). For centuries, the settlement was commonly called São Sebastião instead of the currently popular second half of its name. The city was founded as a base from which to invade a nearby French settlement. The Portuguese succeeded in 1567 and the French were expelled. Later, São Sebastião was frequently attacked by pirates and privateers, especially by then enemies of Portugal, such as the Netherlands and France.

Paço Imperial, 18th century palace that served subsequently as seat for the colonial government, King John IV of Portugal and the two Emperors of Brazil.

The exact place of Rio's foundation is at the foot of Pão de Açúcar (Sugarloaf Mountain). Later, the whole city was moved within a palisade on top of a hill, imitating the medieval European defense strategy of fortified castles ? the place has since then been called Morro do Castelo (Castle Hill). Thus, the city developed from the current center (Downtown) southwards and then westwards; an urban movement which continues today.

In the late 16th century, the Portuguese crown began treating the village as a strategic location for the Atlantic transit of ships between Brazil, the African colonies and Europe. Fortresses were built and an alliance was formed with nearby native tribes to defend the settlement. 

Rio's neighbor, Niterói, for instance, was founded by Araribóia, a Tamoio Indian chief, for defensive purposes. Sugar cane was the first industry in the area. First native, and later African, slaves were used for manual labor. Eventually the industry dwindled as higher quality sugar cane from northern Brazil became more available.

Until early in the 18th century, the city was threatened or invaded by several, mostly French pirates and buccaneers, such as Jean-François Duclerc and René Duguay-Trouin. After 1720, when the Portuguese found gold and diamonds in the neighboring captaincy of Minas Gerais, Rio de Janeiro became a much more useful port for exporting wealth than Salvador, Bahia, which is much farther to the north. In 1763, the colonial administration in Portuguese America was moved to Rio. The city remained primarily a colonial capital until 1808, when the Portuguese royal family and most of the associated Lisbon nobles, fleeing from Napoleon's invasion of Portugal, moved to Rio de Janeiro. The kingdom's capital was transferred to the city, which, thus, became the only European capital outside of Europe. After 1889 Rio de Janeiro became the capital of the Republic.

Until the early years of the 20th century, the city was largely limited to the neighbourhood now known as the historic Downtown business district (see below), on the mouth of Guanabara Bay. The city's centre of gravity began to shift south and west to the so-called Zona Sul (South Zone) in the early part of the 20th century, when the first tunnel was built under the mountains located between Botafogo and the neighbourhood now known as Copacabana. That beach's natural beauty, combined with the fame of the Copacabana Palace Hotel, the luxury hotel of the Americas in the 1930s, helped Rio to gain the reputation it still holds today as a beach party town. When Juscelino Kubitschek was elected president in 1955, he built Brasília, at great cost, by 1960. On April 21 that year the capital of Brazil was officially moved from Rio de Janeiro to Brasília.

Although no longer the capital city of Brazil, Rio has always been the symbol of Brazil's nationality and diverse social structure.