Elated fans cheered and lit flares when the squad arrived on an open-top bus bearing the word "Campeones" (champions) on the side at the club's traditional celebration spot, the Plaza de Cibeles, as confetti rained down.
Team captain Sergio Ramos and other players decked in white shirts with the number 33 on the back filmed the crowd with mobile phones from the top of the bus, which was escorted by police on horseback.
Ramos took to a walkway over the plaza's fountain and draped the statue of the goddess Cybele with the club flag just before 3:00 am (0100 GMT) as Queen's anthem "We Are the Champions" blared out from loudspeakers.
Real Madrid left-back Marcelo then tied a team scarf around the statue as the crowd cheered.
"We have to win the Champions League now. We are counting on all of your support. Let's Go! Thank you very much," Portuguese striker Cristiano Ronaldo said atop the walkway before singing along with the crowd.
Ronaldo and French striker Karim Benzema scored the two goals which gave Real their win over Malaga and their first Spanish league title since 2012.
Here they are celebrating in the dressing room:
The club will pursue a third UEFA Champions League victory in four seasons in the final against Juventus, who on Sunday secured third successive Serie A and Coppa Italia double, in Cardiff on June 3rd.
"This is great and on June 3rd against Juventus it will be even better," said 37-year-old Real supporter Emilio Guillen as he celebrated with friends at Plaza de Cibeles.
If Real win the Champions League, it would be the club's first La Liga and European champions cup double in nearly six decades.
Many fans heaped praise on Real coach Zinedine Zidane, the former French international who took over the club for his first head coaching job less than two years ago.
"Hiring Zidane was the best decision Real has made in a long time," said Alfredo Cordero, 36, who had a club flag drapped over his back and carried a large plastic cup of sangria.
The team will be welcomed to Madrid city hall on Monday for a ceremony to celebrate their Spanish league win.
"They are players of a very high quality, so I don't have to say more. I am a Real Madrid fan and I am thrilled," said 31-year-old Real supporter Alvaro Morales.