Paleo-Americans first inhabited what is now known as Nicaragua as far back as 12,000 BCE. In later pre-Columbian times, Nicaragua's indigenous people were part of the Intermediate Area, between the Mesoamerican and Andean cultural regions, and within the influence of the Isthmo-Colombian area. Nicaragua's central region and its Caribbean coast were inhabited by Macro-Chibchan language ethnic groups. They had coalesced in Central America and migrated also to present-day northern Colombia and nearby areas. They lived a life based primarily on hunting and gathering, as well as fishing, and performing slash-and-burn agriculture.

At the end of the 15th century, western Nicaragua was inhabited by several different indigenous peoples related by culture to the Mesoamerican civilizations of the Aztec and Maya, and by language to the Mesoamerican Linguistic Area. The Chorotegas were Mangue language ethnic groups who had arrived in Nicaragua from what is now the Mexican state of Chiapas sometime around 800 CE. The Pipil-Nicarao people were a branch of Nahuas who spoke the Nahuat dialect, and like the Chorotegas, they too had come from Chiapas to Nicaragua in approximately 1200 CE. Prior to that, the Pipil-Nicaraos had been associated with the Toltec civilization. Both the Chorotegas and the Pipil-Nicaraos were originally from Mexico's Cholula valley, and had gradually migrated southward. Additionally, there were trade-related colonies in Nicaragua that had been set up by the Aztecs starting in the 14th century.

In 1502, on his fourth voyage, Christopher Columbus became the first European known to have reached what is now Nicaragua as he sailed southeast toward the Isthmus of Panama. Columbus explored the Mosquito Coast on the Atlantic side of Nicaragua but did not encounter any indigenous people. 20 years later, the Spaniards returned to Nicaragua, this time to its southwestern part. The first attempt to conquer Nicaragua was by the conquistador Gil González Dávila, who had arrived in Panama in January 1520. In 1522, González Dávila ventured into the area that later became known as the Rivas Department of Nicaragua. It was there that he encountered an indigenous Nahua tribe led by a chieftain named Macuilmiquiztli, whose name has sometimes been erroneously referred to as "Nicarao" or "Nicaragua". At the time, the tribe's capital city was called Quauhcapolca. González Dávila had brought along two indigenous interpreters who had been taught the Spanish language, and thus he was able to have a discourse with Macuilmiquiztli. After exploring and gathering gold in the fertile western valleys, González Dávila and his men were attacked and driven off by Chorotega natives led by the chieftain Diriangen. The Spanish attempted to convert the tribes to Christianity; the people in Macuilmiquiztli's tribe were baptized, but Diriangen, however, was openly hostile to the Spaniards.

The first Spanish permanent settlements were founded in 1524. That year, the conquistador Francisco Hernández de Córdoba founded two of Nicaragua's principal cities: Granada on Lake Nicaragua was the first settlement, followed by León at a location west of Lake Managua. Córdoba soon built defenses for the cities and fought against incursions by other conquistadors. Córdoba was later publicly beheaded as a consequence for having defied the authority of his superior, Pedro Arias Dávila. Córdoba's tomb and remains were discovered in 2000 in the ruins of León Viejo.

The clashes among Spanish forces did not impede their destruction of the indigenous people and their culture. The series of battles came to be known as the "War of the Captains". Pedro Arias Dávila was a winner; although he had lost control of Panama, he moved to Nicaragua and successfully established his base in León. In 1527, León became the capital of the colony. Through adroit diplomatic machinations, Arias Dávila became the colony's first governor.

Without women in their parties, the Spanish conquerors took Nahua and Chorotega wives and partners, beginning the multiethnic mix of native and European stock now known as "mestizo", which constitutes the great majority of the population in western Nicaragua. Many indigenous people died as a result of new infectious diseases, compounded by neglect by the Spaniards, who controlled their subsistence. Furthermore, a large number of other natives were captured and transported to Panama and Peru between 1526 and 1540, where they were forced to perform slave labor.

In 1610, the Momotombo volcano erupted, destroying the city of León. The city was rebuilt northwest of the original, which is now known as the ruins of León Viejo. During the American Revolutionary War, Central America was subject to conflict between Britain and Spain. British navy admiral Horatio Nelson led expeditions in the Battle of San Fernando de Omoa in 1779 and on the San Juan River in 1780, the latter of which had temporary success before being abandoned due to disease.

The Captaincy General of Guatemala was dissolved in September 1821 with the Act of Independence of Central America, and Nicaragua soon became part of the First Mexican Empire. After the monarchy of the First Mexican Empire was overthrown in 1823, Nicaragua joined the newly formed United Provinces of Central America, which was later renamed as the Federal Republic of Central America. Nicaragua finally became an independent republic in 1838.

Rivalry between the Liberal elite of León and the Conservative elite of Granada characterized the early years of independence and often degenerated into civil war, particularly during the 1840s and 1850s. Managua was chosen as the nation's capital in 1852 to allay the rivalry between the two feuding cities. During the days of the California Gold Rush, Nicaragua provided a route for travelers from the eastern United States to journey to California by sea, via the use of the San Juan River and Lake Nicaragua. Invited by the Liberals in 1855 to join their struggle against the Conservatives, a United States adventurer and filibuster named William Walker set himself up as President of Nicaragua, after conducting a farcical election in 1856. Costa Rica, Honduras, and other Central American countries united to drive Walker out of Nicaragua in 1857, after which a period of three decades of Conservative rule ensued.

Great Britain, which had claimed the Mosquito Coast as a protectorate since 1655, delegated the area to Honduras in 1859 before transferring it to Nicaragua in 1860. The Mosquito Coast remained an autonomous area until 1894. José Santos Zelaya, President of Nicaragua from 1893 to 1909, negotiated the annexation of the Mosquito Coast to the rest of Nicaragua. In his honor, the region was named "Zelaya Department".

Throughout the late 19th century, the United States and several European powers considered a scheme to build a canal across Nicaragua, linking the Pacific Ocean to the Atlantic.

In 1909, the United States provided political support to Conservative-led forces rebelling against President Zelaya. On November 18, 1909, U.S. warships were sent to the area after 500 revolutionaries (including two Americans) were executed by order of Zelaya. Zelaya resigned later that year.

In August 1912, the President of Nicaragua, Adolfo Díaz, requested the secretary of war, General Luis Mena, to resign for fear he was leading an insurrection. Mena fled Managua with his brother, the chief of police of Managua, to start an insurrection. When the U.S. delegation asked President Díaz to ensure the safety of American citizens and property during the insurrection, he replied he could not, and asked the United States to intervene in the conflict.

United States Marines occupied Nicaragua from 1912 to 1933, except for a nine-month period beginning in 1925. In 1914, the Bryan–Chamorro Treaty was signed, giving the U.S. control over a proposed canal through Nicaragua, as well as leases for potential canal defenses. Following the evacuation of U.S. Marines, another violent conflict between Liberals and Conservatives took place in 1926, which resulted in the return of U.S. Marines.

From 1927 until 1933, rebel general Augusto César Sandino led a sustained guerrilla war first against the Conservative regime and subsequently against the U.S. Marines, whom he fought for over five years. When the Americans left in 1933, they set up the Guardia Nacional (national guard), a combined military and police force trained and equipped by the Americans and designed to be loyal to U.S. interests.

After the U.S. Marines withdrew from Nicaragua in January 1933, Sandino and the newly elected administration of President Juan Bautista Sacasa reached an agreement by which Sandino would cease his guerrilla activities in return for amnesty, a grant of land for an agricultural colony, and retention of an armed band of 100 men for a year. However, due to a growing hostility between Sandino and National Guard director Anastasio Somoza García and a fear of armed opposition from Sandino, Somoza García decided to order his assassination. Sandino was invited by Sacasa to have dinner and sign a peace treaty at the Presidential House in Managua on the night of February 21, 1934. After leaving the Presidential House, Sandino's car was stopped by soldiers of the National Guard and they kidnapped him. Later that night, Sandino was assassinated by soldiers of the National Guard. Hundreds of men, women, and children from Sandino's agricultural colony were executed later.

Nicaragua has experienced several military dictatorships, the longest being the hereditary dictatorship of the Somoza family, who ruled for 43 nonconsecutive years during the 20th century. The Somoza family came to power as part of a U.S.-engineered pact in 1927 that stipulated the formation of the Guardia Nacional to replace the marines who had long reigned in the country. Somoza García slowly eliminated officers in the national guard who might have stood in his way, and then deposed Sacasa and became president on January 1, 1937, in a rigged election.

Nicaragua declared war on Germany on December 8, 1941, during World War II. No soldiers were sent to the war, but Somoza García did seize the occasion to confiscate properties held by German Nicaraguan residents. In 1945, Nicaragua was among the first countries to ratify the United Nations Charter.

On September 21, 1956, Somoza García was shot to death by Rigoberto López Pérez, a 27-year-old Liberal Nicaraguan poet. Luis Somoza Debayle, the eldest son of the late president, was appointed president by the congress and officially took charge of the country. He is remembered by some for being moderate, but was in power only for a few years and then died of a heart attack. His successor as president was René Schick Gutiérrez, whom most Nicaraguans viewed "as nothing more than a puppet of the Somozas". Somoza García's youngest son, Anastasio Somoza Debayle, often referred to simply as "Somoza", became president in 1967.

An earthquake in 1972 destroyed nearly 90% of Managua, creating major losses. Instead of helping to rebuild Managua, Somoza siphoned off relief money. The mishandling of relief money also prompted Pittsburgh Pirates star Roberto Clemente to personally fly to Managua on December 31, 1972, but he died en route in an airplane accident. Even the economic elite were reluctant to support Somoza, as he had acquired monopolies in industries that were key to rebuilding the nation.

The Somoza family was among a few families or groups of influential firms which reaped most of the benefits of the country's growth from the 1950s to the 1970s. When Somoza was deposed by the Sandinistas in 1979, the family's worth was estimated to be between $500 million and $1.5 billion.

In 1961, Carlos Fonseca looked back to the historical figure of Sandino, and along with two other people (one of whom was believed to be Casimiro Sotelo, who was later assassinated), founded the Sandinista National Liberation Front (FSLN). After the 1972 earthquake and Somoza's apparent corruption, the ranks of the Sandinistas were flooded with young disaffected Nicaraguans who no longer had anything to lose.

In December 1974, a group of the FSLN, in an attempt to kidnap U.S. ambassador Turner Shelton, held some Managuan partygoers hostage (after killing the host, former agriculture minister, Jose Maria Castillo), until the Somozan government met their demands for a large ransom and free transport to Cuba. Somoza granted this, then subsequently sent his national guard out into the countryside to look for the perpetrators of the kidnapping, described by opponents of the kidnapping as "terrorists".

On January 10, 1978, Pedro Joaquín Chamorro Cardenal, the editor of the national newspaper La Prensa and ardent opponent of Somoza, was assassinated. It is alleged that the planners and perpetrators of the murder were at the highest echelons of the Somoza regime.

The Sandinistas forcefully took power in July 1979, ousting Somoza, and prompting the exodus of the majority of Nicaragua's middle class, wealthy landowners, and professionals, many of whom settled in the United States. The Carter administration decided to work with the new government, while attaching a provision for aid forfeiture if it was found to be assisting insurgencies in neighboring countries. Somoza fled the country and eventually ended up in Paraguay, where he was assassinated in September 1980, allegedly by members of the Argentinian Revolutionary Workers' Party.

In 1980, the Carter administration provided $60 million in aid to Nicaragua under the Sandinistas, but the aid was suspended when the administration obtained evidence of Nicaraguan shipment of arms to El Salvadoran rebels. In response to the coming to power of the Sandinistas, various rebel groups collectively known as the "contras" were formed to oppose the new government. The Reagan administration authorized the CIA to help the contra rebels with funding, armaments, and training. The contras operated out of camps in the neighboring countries of Honduras to the north and Costa Rica to the south.

They engaged in a systematic campaign of terror amongst the rural Nicaraguan population to disrupt the social reform projects of the Sandinistas. Several historians have criticized the contra campaign and the Reagan administration's support for it, citing the brutality and numerous human rights violations of the contras. LaRamee and Polakoff, for example, describe the destruction of health centers, schools, and cooperatives at the hands of the rebels, and others have contended that murder, rape, and torture occurred on a large scale in contra-dominated areas. The United States also carried out a campaign of economic sabotage, and disrupted shipping by planting underwater mines in Nicaragua's port of Corinto, an action condemned by the International Court of Justice as illegal. The U.S. also sought to place economic pressure on the Sandinistas, and the Reagan administration imposed a full trade embargo. The Sandinistas were also accused of human rights abuses.

In the Nicaraguan general elections of 1984, which were judged to have been free and fair, the Sandinistas won the parliamentary election and their leader Daniel Ortega won the presidential election. The Reagan administration criticized the elections as a "sham" based on the charge that Arturo Cruz, the candidate nominated by the Coordinadora Democrática Nicaragüense, comprising three right wing political parties, did not participate in the elections. However, the administration privately argued against Cruz's participation for fear his involvement would legitimize the elections, and thus weaken the case for American aid to the contras. According to Martin Kriele, the results of the election were rigged.

After the U.S. Congress prohibited federal funding of the contras in 1983, the Reagan administration nonetheless illegally continued to back them by covertly selling arms to Iran and channeling the proceeds to the contras (the Iran–Contra affair), for which several members of the Reagan administration were convicted of felonies. The International Court of Justice, in regard to the case of Nicaragua v. United States in 1984, found, "the United States of America was under an obligation to make reparation to the Republic of Nicaragua for all injury caused to Nicaragua by certain breaches of obligations under customary international law and treaty-law committed by the United States of America". During the war between the contras and the Sandinistas, 30,000 people were killed.

In the Nicaraguan general election, 1990, a coalition of anti-Sandinista parties (from the left and right of the political spectrum) led by Violeta Chamorro, the widow of Pedro Joaquín Chamorro Cardenal, defeated the Sandinistas. The defeat shocked the Sandinistas, who had expected to win. Commentators such as Noam Chomsky and Brian Willson attributed the outcome to the U.S.-Contra threats to continue the war if the Sandinistas retained power, the general war-weariness of the Nicaraguan population, and the abysmal Nicaraguan economic situation.

Exit polls of Nicaraguans reported Chamorro's victory over Ortega was achieved with a 55% majority. Chamorro was the first woman president of Nicaragua. Ortega vowed he would govern desde abajo (from below). Chamorro came to office with an economy in ruins, primarily because of the financial and social costs of the contra war with the Sandinista-led government. In the next election, the Nicaraguan general election, 1996, Daniel Ortega and the Sandinistas of the FSLN were defeated again, this time by Arnoldo Alemán of the Constitutional Liberal Party (PLC).

In the 2001 elections, the PLC again defeated the FSLN, with Alemán's Vice President Enrique Bolaños succeeding him as President. Subsequently, however, Alemán was convicted and sentenced in 2003 to 20 years in prison for embezzlement, money laundering, and corruption; liberal and Sandinista parliament members subsequently combined to strip the presidential powers of President Bolaños and his ministers, calling for his resignation and threatening impeachment. The Sandinistas said they no longer supported Bolaños after U.S. Secretary of State Colin Powell told Bolaños to keep his distance from the FSLN. This "slow motion coup d'état" was averted partially by pressure from the Central American presidents, who vowed not to recognize any movement that removed Bolaños; the U.S., the OAS, and the European Union also opposed the action.

Before the general elections on November 5, 2006, the National Assembly passed a bill further restricting abortion in Nicaragua. As a result, Nicaragua is one of five countries in the world where abortion is illegal with no exceptions. Legislative and presidential elections took place on November 5, 2006. Ortega returned to the presidency with 37.99% of the vote. This percentage was enough to win the presidency outright, because of a change in electoral law which lowered the percentage requiring a runoff election from 45% to 35% (with a 5% margin of victory). Nicaragua's 2011 general election resulted in re-election of Ortega, with a landslide victory and 62.46% of the vote. In 2014 the National Assembly approved changes to the constitution allowing Ortega to run for a third successive term.

In November 2016, Ortega was elected for his third consecutive term (his fourth overall). International monitoring of the elections was initially prohibited, and as a result the validity of the elections has been disputed, but observation by the OAS was announced in October. Ortega was reported by Nicaraguan election officials as having received 72% of the vote. However the Broad Front for Democracy (FAD), having promoted boycotts of the elections, claimed that 70% of voters had abstained (while election officials claimed 65.8% participation). Despite growing fears of autocracy and the increasing governmental powers of Ortega's wife Rosario Murillo (m.1979) as his vice president, Ortega is still popular among many Nicaraguans. This is largely due to the fact that under his presidency, gang violence has diminished, poverty levels have fallen, and Nicaraguan economic growth has surpassed other Latin American countries.