The palace was built in 1245 as an extension of the nearby Palazzo del Podestà, which had proven insufficient for the exigences of the Commune of Bologna. It was therefore initially known as Palatium Novum ("New Palace").
Soon afterwards Enzio was captured by the Guelphs at the Battle of Fossalta, and was moved here after a short stay in Anzola. Enzio was allegedly left free within the palace by day, but by night he was kept into a cage hanging from the ceiling. He was also allowed to meet women. According to a legend, a fruit of one of these meetings was one Bentivoglio (Italian for "I want you good"), which would be the ancestor of the Bentivoglio rulers of Bologna.
In 1386 Antonio di Vincenzo finished the Sala dei Trecento ("Hall of the Three-Hundred"), which was to become the city's archive. The last floor was largely renovated in 1771. The current Gothic appearance dates from the restoration of 1905.
On the right of the palace is the access to the chapel of Santa Maria dei Carcerati, where passed the condemned to death. In the first floor was held the Carroccio and the war machines, while in the middle floor were the offices of the praetor and the chapel.