The measures will reduce the speed limit to 70km/hour (44 miles/hour).
In Spain, the usual speed limit is 120km/h on motorways, 100km/h on dual carriageways and 90km/h on single lane roads.
The measure began at 6am on Thursday morning, affecting vehicles travelling both within the city and on the M-30 motorway, which had heavy tail backs as the new speed limit came into force.
The initiative was announced after Madrid recorded dangerous levels of nitrogen dioxide on Wednesday; 11 out of 24 stations recorded levels exceeding the limit of 200 micrograms
If pollution levels continue today and tomorrow, the next step will be to prohibit non-residents from parking in the city centre, according to Spanish daily El País.
Drivers are being dissuaded from driving by messages that flash up on billboards along the motorway, saying "don´t drive because of pollution".
Madrid's City Hall is encouraging the city's residents to use public transport and has warned people with breathing problems not to undertake any outdoor exercise.
While environmental campaigners have welcomed the initiative, experts have questioned the measures; the first time the speed limit has been implemented in Madrid.
"The only thing that will lower the levels of nitrogen dioxide is to completely ban cars from cities," Xavier Querol, research professor at the Spanish National Research Council, told El País.
Higher pollution levels can affect people who suffer from breathing conditions such as asthma.
They have also been proven to cause long term problems with cardiovascular disease and chronic respiratory problems.