In 1499, this became the site of the Chapel of the Espírito Santo (Holy Spirit), part of the city´s restruction plan carried out by king Manuel I. At the end of the 16th century, Bishop Afonso Castelo Branco (1581-85) opted to replace the chapel with the current Church of Misericórdia (Compassion) and an adjoining hospital. One of the most interesting facets of its construction is that it is the only such building in the Algarve laid out in the form of the Greek cross.
The 1755 earthquake caused major damage resulting in Bishop Francisco Gomes (1795-1815) redeveloping the façade and building a new hospital in line with a project drawn up by Italian architect Francisco Xavier Fabri. He was also responsible for the Arco da Vila (Town Archway), located on the opposite side of the square.
Inside, the main altar attracts attention with its interesting Mannerist retable from the early 17th century. The triumphal arch, lavishly decorated in rococo carving, establishes a connection between the two co-lateral altarpieces. The church further contains a valuable set of 18th century statues.