The building went through several alterations over the centuries until 1909, when it was demolished, and a slightly modified version was rebuilt a short distance from its original position to allow the enlargement of Piazza Venezia as part of the construction of the Vittoriano.

[1] The Palazzetto originated in 1467, by the will of Pope Paul II, as the southern wing and viridarium (porticoed garden) of the more famous Palazzo San Marco.

[3] During the earthquake of 5 October 1651, a large portion of the facade overlooking Piazza San Marco collapsed; the structure was shored up, but the damage was extensive.

The building was saved from destruction thanks to the interest of Antonio Canova, who therein established his Academy of Fine Arts of the Kingdom of Italy and received the support of the consul Giuseppe Tambroni and of Vivant Denon.

Despite protests raised by politicians and intellectuals—including the deputy Ruggero Bonghi—many historical structures were irreparably destroyed between 1885 and 1886, such as the Tower of Paul III, the Convent of Santa Maria in Aracoeli, and the annexed garden[clarification needed].

In response to a parliamentary question presented by Bonghi, the Prime Minister Agostino Depretis replied that the eviction of the area and the demolition of squalid, unhealthy, and dilapidated buildings would restore dignity and healthiness to the square and the district.

However, the demolition of the Palazzetto came to a standstill due to bureaucratic delays related to the various reconstruction projects, as well as grievances from the Austrian government, who owned the building.

[3] The reconstruction, completed in 1913, involved some architectural changes; in particular, the characteristic and unusual trapezoidal plan, due to the course of the surrounding streets, was converted into a square and the size of the building was reduced through the elimination of an arch on each side.

[5] During the excavations for the demolition and relocation of the Palazzetto, some archaeological finds came to light; one of them, a marble slab representing a man and a woman lying on a klinē (couch) with two handmaids serving them food, was repurposed upside-down as the sill of a window overlooking Via degli Astalli.

Subsequent investigations revealed the presence of an unfinished bunker beneath the building, located about 15 metres (49 ft) under the pavement and accessed via a narrow walkway of Roman origin.

Its construction secretly began around 1942, and it would have become the twelfth bunker in Rome, with the aim of protecting Mussolini from possible Allied air raids, such as the so-called "Operation Dux".