Officers raided a house in the southern province of Granada and found the site, which was located three stories underground, said a police statement.
Neighbours could not hear guns going off because of the depth of the range, it added.
Police said it was the first time they had found a "illegal shooting range run by a criminal group" in Spain.
Authorities believe the site was used to test weapons that the group supplied to drug trafficking rings, who then used them to defend themselves or attack rival gangs.
"The operation has removed weapons from the streets that could have been used to commit extremely serious crimes," the statement said.
Police said the group offered to sell assault rifles, submachine gins and automatic pistols, as well as ammunition, bulletproof vests and other tactical equipment.
Officers arrested three people and seized several weapons and more than 60,000 euros ($68,000) in cash. They said further arrests were possible.
Spain is a major gateway to Europe for drug trafficking networks due to its ties to former colonies in Latin America and its proximity to Morocco, a top cannabis producer.
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