It's thought that the first inhabitants of Palau came from eastern Indonesia. Carbon dating of ancient habitation sites shows that the Rock Islands were settled by at least 1000 BC. These early Palauans developed fairly complex matrilineal and matriarchal social systems, wherein money and property were inherited by women though owned by the clan.

The first European to sight Palau was probably Ruy Lopez de Villalobos of Spain in 1543. Spain claimed the islands in 1686 but did nothing to develop or colonize them. It wasn't until 1783, when English captain Henry Wilson shipwrecked on a reef off Palau's Ulong Island, that any significant contact between Palauans and Westerners began. Wilson was aided by Koror's chief, Ibedul, who helped rebuild the ship and then sent his son, Prince Lebuu, back with the sailors to be educated in England. Although Lebuu died of smallpox shortly after arriving in London, his presence there touched many Britons and piqued their interest in Palau. The country soon became Palau's main trading partner and remained so for over 100 years, until the Spanish returned and expelled them in 1885.

Spanish missionaries introduced Christianity and a written alphabet to Palau before Spain sold the country to Germany in the wake of the Spanish-American War. Germany took control in 1899 and immediate set about curtailing the devastating effects of Western diseases on the local populace. They then forced the Palauans into servitude while setting up coconut plantations and other business ventures.

Japan occupied Palau from 1914 until the end of WWII. It was during this time that Palauan culture went through its greatest transformation: free public schools were opened, instructing islanders in a subservient dialect of the Japanese language, and village chiefs lost power to Japanese colonial bureaucrats. Koror was developed into a bustling modern city, with paved roads, electricity and piped-in water; thousands of Japanese, Korean and Okinawan laborers were imported; and the traditional inheritance patterns were shattered as Palauans lost their land, either through sale or confiscation.

In the late 1930s, Japan closed Palau to the outside world and began concentrating its efforts to develop military fortifications throughout the islands. During the final stages of WWII, Japanese installations across Palau became targets for Allied attacks. The fiercest fighting took place on Peleliu and Angaur; the more heavily populated Koror and Babeldaob (where the Japanese had relocated most Palauans) were never invaded.

When the USA began to administer Palau after the war, it hoped to spin it off with the rest of Micronesia into a single political entity. Palauans, however, held out, voting in 1978 against becoming a part of the Federated States of Micronesia in favor of retaining a separate identity. In 1980, Palau adopted its own constitution, and the first president, Haruo Remeliik, took office in 1981. Koror was named the provisional capital, though the constitution requires that it eventually be moved to Melekeok State in Babeldaob.

The transition to self governance, however, has not been easy: in 1985, Remeliik was assassinated (the crime remains unsolved), and his successor, Lazarus Salii, was found shot to death in an apparent suicide after being placed under investigation for accepting political payoffs. Palau's next president, Ngiratkel Etpison, a successful businessman and part-owner of the Palau Pacific Resort, was the first to serve out his term in full.

On 1 October 1994, Palau officially became an independent nation, ending 47 years as a Trust Territory. That same year it was admitted to the United Nations. The USA retains some rights to a third of Palauan territory, thanks to its Compact of Free Association, which netted Palau a hefty US$450 million financial package for the first 15 years of the 50-year compact.

Post-independence has been difficult with political power struggles, the Asian economic crisis and lack of infrastructure. But Tommy Remengesau, who replaced Kuniwo Nakamura as president in November 2000, has promised to make Pulau more organised and more self-sufficient. Besides, this country more than any other in Micronesia epitomises tropical paradise.

The people of Belau, as the islanders call their homeland, may appear to be among the most Westernized of all Micronesians in their casual American togs and baseball caps. However, they still frown upon skimpy beach attire away from the water, and most homes and many public buildings require that you leave your shoes near the door. Furthermore, many traditional rites have been retained over the years, such as those for a first-born child, and village chiefs still command an important role in the social hierarchy.

Most Palauans are Christian, with the Catholic and Protestant churches well established and Jehovah's Witnesses, Seventh-Day Adventists and Bahais gaining in membership. Modekngei is a revived form of the indigenous religion, which also shows up in traditions such as leaving a light on to ward off spooks.

Staples of the traditional Palauan diet include coconut milk and meat (copra), cassava (tapioca), sweet potatoes and all sorts of fish and seafood. Japanese and American mealtime influences are common. Although not as prevalent as it is on Yap, many Palauans chew betel nut, which when mixed with lime powder produces copious amounts of bright red spit. Old-time chewers are noted by their red teeth, newcomers by the stains on their chins and shirts.

Palauan is spoken at home and in casual situations, while English is more common in business and government. Schools teach both languages, so most Palauans are bilingual from an early age. The South-West Islanders speak some Sonsorolese and Tobian languages. Islanders have borrowed the Hawaiian term haole to refer to foreigners.