The events of the novel occur in Valverde de Lucerna, a small village located on the edge of an idyllic lake. Legend tells that submerged beneath that lake exists a hidden city. The physical village and the legendary city serve as symbols of the spiritual and the material.
Both the mountain and lake acquire a human dimension in the character of Don Manuel, evidenced in the quote “Ya toda ella era don Manuel, don Manuel con el lago y la montaña” ("now everything was don Manuel, don Manuel with the lake and the mountain.") The mountain and lake have also been interpreted as symbolizing powerful faith and superficial faith, respectively, due to the frequent appearance of the mountain's reflection in the lake. This reflection does not penetrate the surface of the lake.
The fictional location in San Manuel Bueno, mártir was perhaps inspired by a real place, as suggested by the real life lake San Martín de Castañeda, in Sanabria, at the foot of the ruins of a convent to St. Bernard where to this day lives a legend of a submerged city (Valverde de Lucerna) sleeping at the bottom of the lake.