The native inhabitants of the region were the Karankawa people, whose initial contact with Europeans came in the 16th century when Spanish expeditions first traversed their territory.

[5] In the 1820s, English-speaking settlers arrived and came into frequent conflict with the Karankawa, who were eventually driven out of the area.

The town was originally called Trespalacios, but shortened its name due to a nearby post office already using the longer version.

[7] The future site of Palacios was ranch land until 1901, when it was put up for sale by the estate of the former owner, Abel "Shanghai" Pierce.

The land was purchased by a development company, surveyed into lots, and with the arrival of the Southern Pacific Railroad and the establishment of the Texas Baptist Encampment, it rapidly grew into a seaside resort town.

[8] City government was established in 1909, and by 1915, Palacios was home to more than 100 businesses, with a post office, library, weekly newspaper, numerous hotels, including the imposing 1903 Luther Hotel along the waterfront, and churches, as well as a large entertainment pavilion built on a pier in the bay.

[9] The population of Palacios boomed during this period, and the city hosted visiting stars such as Rita Hayworth and Glenn Miller.

In 1973, acknowledging the rash of UFO sightings in the area and the state, then Mayor W.C. "Bill" Jackson declared October 24 Palacios' "First Annual UFO Fly-In Day" and called on President Richard Nixon to declare the community the "Interplanetary Capital of the Universe.

"[11] In 1991, a pavilion was rebuilt on the waterfront, and in 1995 the French shipwreck La Belle was discovered at the bottom of the bay, becoming the focus of a major archeological excavation which was staged out of Palacios in 1996-1997.

Palacios has a high percentage of Asian-Americans, as it is home to a large community of Vietnamese immigrants and their families.

[23] The local tourism industry is based on fishing, boating, birding and eco-tourism opportunities.

The city is accessed by Texas State Highway 35 and served by the Palacios Municipal Airport.

[28] Greyhound Lines offers direct bus service from Palacios to Houston, Corpus Christi, and the Rio Grande Valley.