Wangdue Phodrang Dzong was founded in 1638 by the Shabdrung Ngawang Namgyal. The popular story has it that the Shabdrung arrived at the river and happened to see a boy building a sand castle. He asked for the boy's name, which was Wangdue, and thereupon decided to name the Dzong Wangdue Phodrang or 'Wangdue's Palace.'

Wangdue Phodrang Dzong is perched on a spur at the confluence of two rivers the Punak Chhu and Dang Chhu. Its position is remarkable as it completely covers the spur and commands an impressive view over both the north-south and east-west roads. It is obvious that the site was selected for this view of the valley below. However legend relates another reason for choosing this spot: as people searched for a site for a dzong, four ravens were seen flying away in four directions. This was considered an auspicious sign, representing the spreading of religion to the four points of the compass.

Wangdue is important in the history of Bhutan, because in the early days it was the country's secondary capital. After Trongsa Dzong was established in 1644, the Wangdue Phodrang penlop (ruler) became the third most powerful ruler, after the penlops of Paro and Trongsa. The dzong's position gave the penlop a control of the routes of Trongsa, Punakha, Dagana and Thimphu. It is a complex shape, and is actually three separate narrow structures that follow the contours of the hill. There is only one entrance, a large door flanked by huge prayer wheels, which is reached by a road that leads downhill from the bazaar. The Dzong was repaired after a fire in 1837 and again after it was severely damaged in the 1897 earthquake.