The 46-year-old former Olympic yachtsman, who stands nearly two metres (6 feet 6 inches) tall, assumed the crown after an emotional ceremony in the first royal succession of the post-Franco era.
Felipe legally became king at the stroke of midnight (2200 GMT) as an act of parliament signed by his father came into force, formalising the end of 76-year-old Juan Carlos' 39-year reign.
He faces a formidable challenge.
As king, Felipe must restore the image of the monarchy after his father's reign became bogged down in scandal; inspire a people grappling with a 26 percent unemployment rate; and try to unite the nation even as the northeastern region of Catalonia seeks an independence referendum on November 9.
Thousands of red and yellow Spanish flags fluttered through the city, bedecked with white flowers ready for the royal event, which is being secured by 7,000 police. Shops scrambled to sell t-shirts and fridge magnets commemorating the new generation of royals.
Even some Spaniards who glumly sat in Madrid bars and watched their heroes crash out of the World Cup after losing 2-0 to Chile seemed ready to give the new monarch a chance.
Joaquin Lamas, a 34-year-old salesman nursing a beer in the city centre's Taberna del Gijon bar and bemoaning his misery at Spain's performance, said he believed Felipe's ascension to the throne was good news.
"He is someone who will bring something to Spain. I don't think of the king as a king but as an ambassador who represents Spain and as such I think he is trained and he will contribute," Lamas said.
- Festive atmosphere -
"There's a festive atmosphere. It's a party for this new king," said one passerby, Carlos Tesorero, earlier in the day. "All the Spanish people have faith in him. He is very capable and I think he will be a good king."
The Spanish king's elegant 41-year-old wife Letizia, a former television news presenter and the granddaughter of a taxi driver, is now queen.
The couple have two photogenic blonde-haired daughters: seven-year-old Sofia and eight-year-old Leonor who is the youngest heiress to the throne in Europe.
Felipe will wear the red silk sash of the military forces' captain general as he is sworn in and proclaimed king in parliament, which has been draped in a giant red canopy with the state coat of arms embroidered in gold.
He is set to deliver a speech to lawmakers before being driven through Madrid with Queen Letizia, whose dress remains a closely guarded secret.
With Letizia and his parents Juan Carlos and Sofia at his side, Felipe is to appear on the front balcony of the old Royal Palace in central Madrid to greet crowds of well-wishers.
He will then host 2,000 guests including foreign dignitaries at the palace.
In keeping with Spain's tough economic times, festivities remain restrained when compared to other European royal coronations, however, and no foreign dignitaries have been invited.
- Tearful succession -
Hours earlier, a teary-eyed and infirm Juan Carlos, dressed in dark suit and pink tie, ended his reign with a sweep of a golden pen in the vast, tapestry-clad Hall of Columns in the Royal Palace.
Juan Carlos, who walks with the help of a cane after repeated hip operations, hugged Felipe under the palace's huge chandeliers, and briefly gripped his son's arm to steady himself in his final act as monarch.
The former king earned broad respect for guiding Spain to democracy after the death of General Francisco Franco in 1975 and for appearing on national television to thwart an attempted military coup in 1981.
But he outraged public opinion in 2012 when he went on a luxury African elephant-hunting safari as Spaniards suffered at home from a biting recession.
Felipe's elder sister, the 49-year-old Princess Cristina, has been named a tax crime suspect in a judicial investigation into her husband Inaki Urdangarin's allegedly corrupt business dealings.
Cristina's woes could present the first major challenge to Felipe, as an investigating judge in Palma de Mallorca ponders in the weeks ahead whether to send her to trial.
But even as others in the family suffer falling approval ratings, Felipe's popularity has actually climbed.
Indeed, a poll taken after Juan Carlos announced his abdication to a surprised nation on June 2 showed 76.9 percent of respondents had a good or very good opinion of his son.