They voted yesterday 29-19 in favour of scrapping the northern Spanish town's name, in existence since at least 1623, said the mayor, Lorenzo Rodriguez.
Residents decided instead to take on a less offencive, older name for the town, Mota de Judios, or Hill of the Jews, he told AFP.
The town hall will review the vote on June 3 before launching the paperwork for a new name, a process that could take from six months to a year, he said.
The decision should bring an end to the embarrassment of locals, who frequently found themselves trapped into giving awkward explanations to outraged outsiders.
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"When you travel elsewhere, you always have to explain, because people say, 'You kill Jews in Castrillo'," Rodriguez, told AFP.
"It makes no sense because we are descended from a Jewish community. We have a star of David on our coat of arms."
He said the town, which lies near the city of Burgos, was born in 1035 as a safe haven to a persecuted Jewish community, which settled on a hill, or Mota, in the area.
Only Jews who converted to the Roman Catholic faith were allowed to stay in Spain. The alternative was expulsion or death.
Archaeologist Angel Palomino said it was thought descendants of Jews who had converted to Roman Catholicism decided to change the town's name during the Counter-Reformation so as to prove the purity of their faith.
Up to 1,500 people likely lived in the Jewish settlement that later became known as Castrillo Matajudios, he said.
Although estimates vary, historians believe at least 200,000 Jews lived in Spain before the 1492 expulsion. Many who refused to convert or leave were burned at the stake.
The vote on the town's name-change coincides with a recent spate of racist incidents, which have sparked a backlash internationally.