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The Spanish conquest and colonization of El Salvador began in 1524 with the arrival of an expedition from Guatemala led by Pedro de Alvarado. Alvarado's troops met determined opposition from a Nahua tribe, the Pipil, that occupied much of the region west of the Lempa River. However, superior tactics and armaments enabled the Spaniards to push on to the Pipil capital of Cuscatlán. Alvarado soon returned to Guatemala, but a second expedition, in 1525, founded a Spanish town called San Salvador near the site of Cuscatlán. Pipil warriors forced the Spanish settlers to withdraw, however, and the community would be resettled several times before it was permanently established in 1528.

The lands that would form El Salvador became the agricultural heartland of the captaincy general of Guatemala. Although most of the inhabitants were obliged to depend on subsistence farming, the more fortunate Spaniards found wealth in the export of a variety of local products, all of which experienced periods of "boom and bust." Cocoa was the most important source of wealth during the 16th century. Increased competition from other colonies led to a marked drop in revenue from cocoa by 1590, and the following century was clearly a period of stagnation for the region. Recovery in the 1700s came as a result of increased exports of indigo.

The indigo trade led to the development of a fairly sophisticated form of commercial agriculture and the creation of large estates operated by families whose members played a leading role in provincial affairs. For the indigenous people, however, the indigo boom chiefly meant that an additional burden was placed on an already exhausted workforce.

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