Originally, the site was covered by a thick forest and was called Melipulli (Means Four hills in Mapudungun). It was selected as an entrance to Lake Llanquihue when its proximity to the open sea was discovered. In the summer of 1851, an expedition arrived from Chiloé to begin the clearing of the area and the building of houses for the new inhabitants. The city itself was founded on February 12, 1853, after government-sponsored immigration from Germany that began in 1848 populated the region and integrated it politically to the rest of the country. It was named after Manuel Montt, President of Chile between 1851 and 1861, who set in motion the German immigration.
On March 4, 1969, approximately 90 landless squatters decided to settle on otherwise unoccupied farmland — without any title, right, or payment of rent — belonging to an absentee landlord. The squatters received advice from Socialist member of parliament Luis Espinoza due to the local authority never granting them any land they wanted to build houses. Five days later, local Police Chief Rolando Rodríguez Marbán reassured the squatters that they would not be disturbed and could proceed with their home construction. However, new orders received from the ministry of the interior the following day led to a change of plans: At midnight on March 9, Espinoza was charged with breaking the law, arrested, and moved to the city of Valdivia. At dawn, 250 policemen launched an assault on the squatters, following direct orders from Interior Minister Edmundo Pérez Zujovic. The final result was that all newly-built homes were burned to the ground and 11 squatters were shot dead.
The massacre of Puerto Montt and the public outcry that followed were major factors contributing to the fall of Eduardo Frei's government, which was succeeded by Salvador Allende's Unidad Popular in the next year's elections.The events were described by singer-songwriter Víctor Jara in his song Preguntas por Puerto Montt.