Palme had always insisted on living like an ordinary citizen. Despite holding Sweden's highest office, he routinely walked the streets of Stockholm without security, rode public transportation, and answered his own telephone. On that final evening, he and Lisbeth left their apartment at 20:30, took the subway to Rådmansgatan station, and walked to the Grand Cinema to meet their son. After the film, the couple headed home on foot. Witnesses later commented on the strange sight of the Prime Minister walking unprotected through the winter darkness. At the corner of Sveavägen and Tunnelgatan, near the Adolf Fredrik Church, a man appeared from behind and fired. A taxi driver used his mobile radio to raise the alarm. Palme was pronounced dead at Sabbatsberg Hospital at 00:06 on March 1st.

The assassination sent shockwaves across the globe. Cuba, Portugal, and Nicaragua declared three days of national mourning. India, Argentina, and Yugoslavia each observed a day of mourning. On March 15th, dignitaries from 125 nations gathered in the Blue Hall of Stockholm City Hall for a two-hour secular funeral. King Carl XVI Gustaf delivered a eulogy, as did UN Secretary-General Javier Pérez de Cuéllar, Indian Prime Minister Rajiv Gandhi, and former West German Chancellor Willy Brandt. Jazz musician Arne Domnérus, one of Palme's favorites, led a small orchestra. Finnish singer Arja Saijonmaa performed a Swedish version of Violeta Parra's "Gracias a la vida." Palme was buried at Adolf Fredrik Church, just meters from where he fell.

The investigation consumed 34 years, 350 million Swedish kronor, and 700,000 pages of documentation, making it the largest murder inquiry in police history. Christer Pettersson, a troubled alcoholic with a manslaughter conviction, was identified by Lisbeth Palme and convicted in 1988, then acquitted on appeal due to tainted lineup procedures and lack of a murder weapon. Theories proliferated wildly: South African apartheid agents retaliating for Palme's support of the ANC, arms dealers connected to the Bofors scandal in India, the CIA working with the Italian lodge Propaganda Due, Kurdish separatists, Yugoslav intelligence operatives, Swedish right-wing extremist police officers. A Smith & Wesson .357 Magnum recovered from a lake in 2006 was too corroded to test conclusively.

In June 2020, prosecutors named their final suspect: Stig Engström, an insurance company employee known as "the Skandia Man" whose office stood next to the murder scene. Engström had presented himself as a witness, claiming to be first on the scene, yet other witnesses described a fleeing killer who matched his appearance exactly. No one corroborated his presence after the shots. His movements that evening, about which he gave false information, placed him at the cinema earlier that night. Engström had died in 2000, making prosecution impossible. The investigation officially closed, though it remained unsolved. In December 2025, prosecutors announced that Engström was no longer considered the main suspect. The case would stay closed anyway. The corner of Sveavägen and Tunnelgatan now bears a simple memorial plaque: "Here, Sweden's Prime Minister Olof Palme was murdered, on 28 February 1986."