As part of the United States-administered Trust Territory of the Pacific Islands (TTPI), Palau was under the flags of the United Nations, the United States, and the Trust Territory. Local desire for a separate state and government was realized on January 1, 1981, and a Palauan flag was hoisted on that occasion. A competition had been held in 1979 that resulted in more than a thousand proposals; the one chosen was created by Blau Skebong and was approved by the new government on October 22, 1980. This flag is still in use today.

The golden disk represents the moon, which has special meaning for Palauan culture. The full moon is traditionally considered the best time for fishing, planting, and other activities. It is said to give the local people “a feeling of warmth, tranquillity, peace, love and domestic unity.” The background of the flag is not, as might be expected, a symbol of the Pacific Ocean; rather, it refers to “the final passage of the foreign administering authority from our land.” Full independence was not achieved by Palau until October 1994, but no alteration was made in the flag at that time. The original flag of 1981 is preserved in the Palau Museum in the capital, Koror.