The 76-year-old Juan Carlos, who led Spain from dictatorship to democracy but was later hurt by scandals, steps down in a short, solemn ceremony in the late afternoon at Madrid's old Royal Palace before 150 guests.
He will sign an act of parliament clearing the way for Felipe, 46, to assume mostly ceremonial role in the first royal succession of the post-Franco era.
Red and white flowers -- nearly 16,000 blooms, according to the City Hall -- adorned the streets to mark the start of the Felipe's reign.
Felipe will pass through them, dressed in a blue military uniform with the red silk sash of the forces' commander in chief, to be sworn in by the parliament on Thursday morning.
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"There's a festive atmosphere. It's a party for this new king," said one passerby, Carlos Tesorero.
"All the Spanish people have faith in him. He is very capable and I think he will be a good king."
The red-and-yellow Spanish flag fluttered from balconies across Madrid and two giant flags hung down the facade of the city hall.
By coincidence, Wednesday was also a big night for Spain's national football team, with a potentially crucial World Cup tie against Chile.
Felipe, a blue-eyed former Olympic yachtsman who stands 1.98 metres tall, legally becomes king at midnight Wednesday when his father's abdication takes effect, government officials say.
Felipe's wife, the elegant 41-year-old former television news reader Letizia, will be queen. They have two blonde-haired daughters, seven-year-old Sofia and eight-year-old Leonor, who will become the youngest direct heir to a throne in Europe.