The roots of Zastava lay in the 1851 founding in Kragujevac of the Vojno-Tehnicki Zavod (Military Technical Institute). The institute developed a cannon foundry division in 1853, becoming a military vocational school in March 1854. During the 1880s, Zastava also begin with the production of firearms. At the end of the 19th century the cannon foundry changed its name to the Military Engineering Works. The firm rapidly expanded its production program and the complexity and quality of its products.

In 1904, within the company, a section dedicated to automobiles is inaugurated. Beside repair services, certain car parts are also manufactured. In 1939 it begins assembling Chevrolet military trucks. Production came to a halt in 1941 with the Axis invasion of Yugoslavia and by then, 400 trucks came out of the factory which consisted of a working force of 12,000 men

After World War II, the plant was renamed Zavodi Crvena Zastava ("Red Flag Factories"). In a referendum held on August 26, 1953, 96% of the employees of then Zavodi Crvena Zastava voiced their desire to produce automobiles. That year, 162 Willys Jeeps would leave Kragujevac lines.

On August 12, 1954 Zastava signed a cooperation agreement with Fiat. Three months later, Kragujevac began assembling the Fiat 1400, 1100 B, and AR-55 Campagnola.

Fiat 1400 was Zastava's first assembled automobile, but Fića Zastava's licence built version of Fiat 600 is its iconic historical brand. 923,487 of Zastava 750 were produced over a span of 30 years, with several different engines and in various equipment levels, from October 18, 1955 through November 18, 1985.

Total vehicle production in 1955 was 1,044 and by 1958 it had risen to 3,596. During 1957 and 1958 Zastava established a supplier network. Zastava outsourced engine manufacture to Rakovica-based engine manufacturer 21. Maj (DMB).

Zastava's annual production climbed to 13,719 units in 1960. The company entered the new decade with a replacement for the 1400: Fiat's 1100, shown in Geneva as the successor to the 1100 B.

With the advent of the 1961 Fiat 1300/1500 came Zastava's 1300/1500 series, produced as both sedans and wagons. With all-around disc brakes, rear-wheel drive and up to 72 horsepower, the "tristać" was Yugoslavia's favorite upmarket car. Today, many across the former Yugoslavia recall the 1300 as Zastava's best automobile ever: the Jugoslovenski Mercedes as they call it. 201,160 copies of the 1300 and 1500 were produced from 1961 through December 20, 1979.

1965 marked the official beginning of Zastava exports, with 6,000 cars sent to Poland.

In 1967, Zastava produced about 52,000 trucks and passenger cars; in 1968, 53,000.

In 1970, Zastava rolled out the 750M, fitted with a new 767 cc engine boasting a thermostat-controlled pressurised cooling system.

In the beginning of the seventies Zastava made arrangement with Fiat to produce Zastava 101, which was based on Fiat 128. It had restyled rear panel and resembled a hatchback body style. This 3 and 5 door variant of Fiat 128 was specific to Zastava and was never released elsewhere by Fiat.

It was said that model 101 should be produced in Yugoslavia for both Yugoslav and Italian market, and vice versa, in the Italian market would have been sold under the marque Innocenti. In spite of this negative record, the car was a good seller in the domestic market as there was a virtual monopoly. Yugoslavs used to buy it because of its moderate price, simple mechanics, cheap spare parts and low maintenance cost compared to other cars assembled in Yugoslavia.

In 1980, the Zastava 850 was launched, with a 31 hp 848 cc engine propelling it to 125 km/h  and a fully synchronized transaxle. Production of the 750 and 850 continued through 1985 in L, LE and SC versions.

In the mid-seventies, Zastava management decided to develop a new model, still based on the same Fiat engine. It was originally to be known as Zastava 102, but the name was dropped in 1981 and the car released as Yugo 45. It was styled by Zastava with some help from Fiat engineers. It was a shortened Fiat 128 and it followed the style of the Fiat 127 and Autobianchi A112 but with a more square appearance. Several variants were made, with 903 cc, 1116 cc, and 1301 cc engines. In 1981, Zastava entered the British market. 811 cars were registered that year, with sales increasing to 3101 in 1982, their first full year.

These were Zastava's best years in number of cars assembled; around 230,000 cars a year towards the end of decade. Zastava cars were to be sold in 70 countries.

In 1988 a new model was released called the Zastava Florida (known as Yugo Sana or Yugo Sana Miami, in some countries). Its exterior was designed by Giorgetto Giugiaro, with a body shape similar to a Fiat Tipo (1988) or Citroën ZX (1991).

In the early 1990s, Zastava was affected greatly by the Balkan Crisis. The factory production became unstable because of a problem with supplies. Exports were impossible during those years, because of trade sanctions imposed on Yugoslavia. As a result, its cars disappeared from most foreign markets after 1992. Production stopped in 1993, even though there was a waiting list for Yugo cars.

Between 1992 and 1995, it was under UN sanctions, and then between 1998 and 2000, it was under EU and US sanctions. As a result, many Zastava subsidiaries abroad were forced to cease trading, such as Zastava (GB) Ltd. in the United Kingdom and Yugo Cars in the United States.

After the war, there were trade talks with Hungarian firms to assemble Yugos in Hungary, but no agreement was reached because of the Yugoslavian partner's hesitation. However, Zastava Trucks were assembled in Hungary, near Pécs, with IVECO engines.

Yugos were facelifted and new versions are introduced in the Belgrade International Motor Show in 2002. The new Zaatava Koral IN had a 1,1l 55HP engine with Bosch electronic injection, the transmission designed by Porsche, slightly new internal and external design, improved safety, and many extra details which were missing from former models. Koral In also have Peugeot 1,1L, 60HP engine.

The new generation of Yugo was granted a FIA certificate, so it was in compliance with European standards.

In October 2000, Vojislav Koštunica became the new president of Yugoslavia (also a Yugo Koral owner) and soon after, the sanctions against the country were lifted the exports resumed.

In October 2005, an agreement with Fiat was reached for production of the Fiat Punto by Zastava for Eastern European markets, which would be commercialed as the Zastava 10. The Koral IN L, with a fuel injected 1.1 L Peugeot engine, met the European Union safety standards in a test supervised by the German Technischer Überwachungsverein (Technical Monitoring Association). This was seem as a chance to pave the way for export to EU countries.

The Zastava 10, based on the Italian Fiat Punto Mark 2b, was the last Zastava's most modern car before this factory was taken by Fiat.

Production of all Zastava cars (Yugo, Skala 101 and Florida) ceased by November 20, 2008. After that day, the only car in production was to be Zastava 10 which has had its front part slightly modified and its name was changed to Punto Classic.

Fiat Group Automobiles (FGA) has signed a memorandum of understanding with the Serbian government for the acquisition of Zastava's Kragujevac plant on 7 May 2008. The memorandum of understanding foresees a new company being set up in which the Italian group would have a 67% of stake and the Serbian government acquiring 33% of stake in the new company. A new company was named Fiat Automobili Srbija.

The new company would make a total investment in the region of 700 million euros, with the government contributing 200 million euros to this. The Zastava plant would produce two new Fiat models, rejecting previous reports the plant could produce the 500 compact city car.

The last Zastava branded car rolled out of the factory on 21 November 2008.