Villanueva del Fresno is the southernmost town of the district of Olivença and also one of the closest to the Portuguese border, with which it has extensive commercial contacts.

People have lived in the Guadiana Valley since prehistoric times, with Paleolithic and Neolithic traces uncovered. The area's most important archaeological relic is a primitive, probably Islamic, settlement known as Cunco Castle, situated between the Ribeira de Cuncos and the Guadiana River. Probably, earlier settlements underlay the site.

The area was contested during the Reconquest, and later during Portugal's struggle for independence from the dual monarchy with the kings of Castille-Leon, during which it was renamed "Vila Nova de Portugal." In the late thirteenth century, the current Villanueva del Fresno was part of bayliato Templar Jerez de los Caballeros, until the pope dissolved the Knights Templar in 1312. In 1332, king Alfonso XI gave his mayordomo, Martin Fernandez Portocarrero, extensive lands surrounding the town. He married the daughter of another aristocrat, and their progeny became known as the Lords of Moguer and Villanueva del Fresno. The Portocarrero family became one of the most distinguished in Spain, and in 1530 Charles V, the Holy Roman Emperor named Juan Portocarrero the Marquise of Villanueva del Fresno. Descendants served in Spain and the colonies and were recognized as grandees of Spain (as Dukes of Alba). The Castillian monarchs recognized the town as independent (and supplying its own troops). The Tower of Homage was built as an addition to the castle during the fourteenth century, to ensure both the town's defence and this part of the border. The Portuguese attacked Villanueva on several occasions, most of which were repulsed. In 1643, a Portuguese army commanded by Mathías of Albuquerque took the town and castle after a long siege. Both were razed in 1646 during the Portuguese Restoration War.

Reconstruction began about 25 years later, after the Treaty of Lisbon (1668). The "new" town was built on the other side of the hill from the original settlement, and that, like in the neighbouring town of Chelan, most of the new townspeople were Portuguese. The rebuilt town was designed with broad streets and plot lines which survive to the present day.

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