King Juan Carlos formally abdicates on Wednesday, ending his 39-year reign, in a Madrid bedecked with flags and flowers to hail his son and successor Felipe VI.

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.

Workers hoisted a great red tapestry with the state coat of arms embroidered in gold over the front doors of the lower house of parliament in central Madrid.

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.

"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.

"It looks more like a football match. Lots of flags. Too much, perhaps," said Jose Manuel Garrucho, a 20-year-old student, outside the parliament.

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 (six and a half feet) 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.

The new king is to be proclaimed after swearing to uphold the constitution and delivering a speech to parliament. He and Letizia will then be driven through Madrid's streets and appear before the crowds on the front balcony of the Royal Palace.

Felipe faces a daunting task to clean up the image of the monarchy, which was restored when Juan Carlos took the throne in 1975 after the death of General Francisco Franco.

Juan Carlos, who now walks with a cane after repeated hip operations, outraged Spaniards in 2012 by going on a luxurious African elephant-hunting safari during a biting recession.

Felipe's 49-year-old sister Cristina risks being put on trial for alleged tax fraud in relation to the business activities of her husband, former Olympic handball player Inaki Urdangarin. She is not invited to the succession party.

Beyond surmounting his own family's woes, Spaniards will look to Felipe to inspire them as they grapple with a 26 percent unemployment rate and to work for national unity as the northeastern region of Catalonia seeks an independence referendum on November 9.

But analysts say some people may have raised their hopes too high, stressing that reform in a democracy is a job for politicians and judges, not for a king.

"Right now the Spanish want him to do just about everything: sort out Catalonia, sort out unemployment," said Cote Villar, a royal specialist at the daily newspaper El Mundo.

"They hope this new face will also be the new face of Spain's institutions, which are in crisis. But at the end of the day he is just the king of a parliamentary democracy, who cannot do much."