The plan of 1929 to establish an institute for theoretical physics under Max von Laue (vice-director since 1922) was not realized, but in 1935 (Einstein had resigned in 1933) the Rockefeller Foundation agreed the Third Reich Government to build an institute in Berlin-Dahlem (inaugurated in 1938 as "Max-Planck-Institut"), equipped with modern apparatus for nuclear and low temperature physics. When in early 1940 the military authorities installed the secret German Uranium Project, the Dutch director Peter Debye took a leave of absence to the United States.

In July 1942 Werner Heisenberg was called to direct the Berlin Institute, which was partly evacuated in 1943 to Hechingen in Southwest Germany. He added research in cosmic ray and elementary particle physics to the program and nearly completed a critical nuclear reactor in 1945. While the Dahlem equipment was removed after the war to the Soviet Union, Heisenberg, von Laue and several institute members were taken into British custody. They returned in 1946 to Göttingen and were allowed to reopen their institute as Max-Planck-Institut (MPI) für Physik. The program now included work on cosmic ray and elementary particle physics, (restricted) nuclear physics, astrophysics and plasmaphysics.

In 1958 the Institute moved to Munich as MPI für Physik und Astrophysik (with Heisenberg and Ludwig Biermann as co-directors). Several daughter institutes (for plasma physics and extraterrestrial physics) were founded. In April 1991 the Institute was split into three MPI's, one für Physik, für Astrophysik and für Extraterrestrische Physik, respectively. The latest "child" was born in 1995 as MPI für Gravitationsphysik (Albert-Einstein-Institut) .

Werner Heisenberg retired from the Institut für Physik at the end of 1970. He was succeeded by a board of dirctors: Léon van Hove (as chairman until 1974), Hans Peter Dürr (retired 1997), Norbert Schmitz, Ulrich Stierlin (died 1994), Gerd Buschhorn (since 1972), Leo Stodolsky (since 1973), Wolfhart Zimmermann (1974-1996), Julius Wess (since 1990), Friedrich Dydak (1991-1997), Volker Soergel (1996-2000), Siegfried Bethke (1999-2006) and Wolfgang Hollik (since 2006). The task of the Physics Institute has not changed since 1970: Elementary particle experiments and theory with connections to relativistic cosmology and many-body physics.