The ruins were found within the Mosul Dam, which sits on the banks of the Tigris River, in the Kurdistan region of Iraq.
Archeologists have now descended on the site to examine the structure that dates back to the Mitten Empire.
Kurdish archeologist, Hasan Ahmed Qasimm said: “The find is one of the most important archaeological discoveries in the region in recent decades.”
It is thought the grand palace would have originally stood just 65ft from the river on a terrace.
It was later reinforced using a wall of mud bricks to keep the structure strong.
Ivana Puljiz, an archeologist from the University of Tübingen’s Institute for Ancient Near Eastern Studies, said the team found evidence of wall paintings that included shades of red and blue.
She said: “We also found remains of wall paints in bright shades of red and blue.
“In the second millennium BCE, murals were probably a typical feature of palaces in the Ancient Near East, but we rarely find them preserved.
“Discovering wall paintings in Kemune (palace) is an archaeological sensation.
“The Mittani Empire is one of the least researched empires of the Ancient Near East.
“Even the capital of the Mittani Empire has not been identified.”
But the team is in a race against time to find out what they can about the ruins before the reservoir fills up with water again.
The team also found a total of 10 cuneiform clay tablets inside the palace, which have been sent to Germany for examination.
Cuneiform is one of the earliest forms of writing, dating back to 3500BCE.