Sarajevo as we know it today was founded by the Ottoman Empire in the 1450s upon conquering the region, with 1461 typically used as the city’s founding date. The first known Ottoman governor of Bosnia, Isa-Beg Išaković, chose the tiny local village of Brodac as a good space for a new city. He exchanged land with its residents (Giving them today's Hrasnica neighborhood in Ilidža), and soon began building his provincial capital as he envisioned it. He quickly built a number of key objects, including a mosque, a closed marketplace, a public bath, a bridge, a hostel, and of course the governor’s castle (‘’Saray’’) which gave the city it’s present name. The mosque was named ‘’Carova Džamija’’ (the Tsar’s Mosque, the Imperial Mosque) in honor of the Sultan Mehmed II.

With the improvements Sarajevo quickly grew into the largest city in the region. Many Christians converted to Islam at this time, as Ottoman reports from the period often tell of residents with Muslim names but of Christian named fathers, such as "Mehmed, son of Ivan". Meanwhile, an Orthodox population first appeared in Sarajevo at this time, as the Orthodox Church was built. A colony of Ragusan merchants also appeared in Sarajevo at this time. Soon after, in the early 16th century, the Sarajevo Haggadah came to Sarajevo along with Jewish refugees from Andalusia. For the first time in its history, Sarajevo was the city of four religions. The Jewish population made note of this, naming the city "The European Jerusalem"

Under the wise leadership of people such as Gazi Husrev-beg (the city’s greatest donor who built most of what is now the Old Town) Sarajevo grew at a rapid rate. Sarajevo became known for its large marketplace and numerous mosques, which by the middle of the 16th century were over a hundred in number. Numerous other buildings appeared, including religious schools, such as the school of Sufi philosophy. Gazi Husrev-Beg himself established a number of buildings named in his honor, such as the Sarajevo library which, in its prime, was in the same category as the Madrassa of Beyazid II.

Gazi Husrev-Beg also built the city's clock tower (Sahat Kula). Sarajevo became one of the most advanced cities in Europe. It had its own water system, clock tower, bathhouses, and schools. In a time when education was merely for the wealthy, and most Europeans considered baths to be unhealthy, Sarayliyas (Sa-ray-lee-yas, residents of Sarajevo) were among the cleanest and most culturally advanced commoners on the continent. A famous Sarajevan poet of the time wrote, "There it seems to man that he can live for a long time, for in a thousand places in Sarajevo flows water from the well of longevity".

At its height, Sarajevo was the biggest and most important Ottoman city in the Balkans after Istanbul itself. By 1660, the population of Sarajevo was estimated to be over 80,000. Comparatively, Belgrade in 1838 had a mere 12,963 inhabitants, and Zagreb as late as 1851 had a lowly 14,000 people. If Sarajevo's fortune would have prevailed until 1700, it would have been the 10th biggest city in Europe. Had its population continued to grow significantly during that period of time, it would have likely been the 7th largest, just under Rome and Milan.

This period of early Ottoman rule will be long remembered as Sarajevo's golden age. The 16th century was its peak, when nearly the whole city area (that would last until the late 19th century) was built. During the 17th century, Sarajevo didn't expand, although its population continued to grow. Its residents lived luxuriously, and Sarajevo was the richest city in the West Balkans after Dubrovnik. However the 1600s also brought the start of the decline of the Ottoman Empire. With the defeats at Vienna, the empire grew weaker, and along with the empire as a whole did its various regions. Although Sarajevo would remain prosperous until the very end of the 17th century, the latter half of it proved to be the beginning of the end.