A group of Leicester fans chanted 'You Spanish b******s, Gibraltar is ours' during violent clashes with with police in Madrid's main square before Wednesday's Champions League encounter.
Footage on social media also showed fans chanting about World War II in the Plaza Mayor Square, where supporters had been told they could gather before the quarter final tie at the Vicente Calderon.
Flares and bottles were thrown during the ugly incident just hours before Craig Shakespeare's side were due to face Atletico Madrid.
The scenes will be a diplomatic embarrassment as relations between England and Spain have been strained in recent weeks with a Brexit row refueling the long-standing dispute over the sovereignty of Gibraltar.