The capital of the khanate was first the castle of "Bayat" in 1748, in the Karabakh Steppe, followed by the newly built town of Panahabad in 1750-1752.
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The siege of Shusha lasted for six months and Fatali khan eventually had to retreat.
In 1761, Karim Khan Zand allied with Panah Ali Khan of Karabakh to defeat Fat'h Ali Khan Afshar of Urmia, who earlier subordinated the khanates of Karabakh, Marageh, and Tabriz.
According to travelers who visited Shusha at the end of 18th-early 19th centuries the town had about 2,000 houses and an approximate population of 10,000, which was mostly Muslim.
In the summer of 1795, Shusha underwent a major attack by Aga Mohammad Khan Qajar, son of Mohammad Hasan khan who attacked Shusha in 1752.
In less than a year after Shusha was founded, the Karabakh khanate was attacked by Mohammad Hasan Khan Qajar, one of the major claimants to the Iranian throne.