The southeastern city of Lorca, where Lozano spent her childhood, declared three days of mourning, referring to her as an "adoptive daughter."
"Margarita Lozano left a deep mark on both the cinema and theatre and acted under the orders of the best directors of the time," Lorca mayor Diego Jose Mateos said in a statement.
Born in 1931 in Tetuan in northern Morocco which was then a Spanish protectorate to a father who was a soldier stationed there, Lozano initially studied design and fashion.
But she abandoned her studies to pursue acting, her true passion, in Madrid, initially in the theatre.
She starred in acclaimed Spanish director Luis Bunuel's 1961 drama "Viridiana" about a young nun about to take her final vows.
The movie won the top Palme d'Or prize at the Cannes Film Festival that year.
In the late 1960s she went to Italy, appearing in Pasolini's 1969 drama "Pigsty" as well as Sergio Leone's 1964 western "A Fistful of Dollars" alongside Clint Eastwood.
She retired for a decade to raise her family but returned to Italian cinema in the 80s, appearing in several films by Paolo Taviani and his brother Vittorio Taviani.
Her friend, Spanish architect Simon Angel Ros who designed her home in the coastal town of Puntas de Calnegre near Lorca where she was living, said Lozano passed away "peaceful".
"Her heart has been weakening slowly, she did not suffer," he told local media.
Lozano's only son Paco flew from Italy where he lives on Saturday to be by her side in her final hours, he added.