Buses were diverted and police closed Princes Street to westbound traffic just days before the proposed 31st May launch date.
The incident happened around 10.30 am at the bottom of the Mound and led to congestion with buses being diverted onto St Andrew Square.
Crowds of onlookers gathered as engineers from Spanish firm CAF moved the tram to assess what caused the fault.
Scott Reid, 47, from Edinburgh, said: “The tram broke down as it reached a one-lane bottleneck outside the National Gallery.
“It was the worst possible bit of road for this to happen and the buses couldn’t get past.
“People were laughing and stopping to take pictures on their phones - it was obviously embarrassing for the driver.
“The police shut Princes Street and the buses were being diverted onto St Andrew Square, engineers and transport officials arrived and eventually moved the tram.
“I saw an Airport Bus reversing back down Waverley Bridge and I just hope something like this doesn’t happen next week when the trams go live.”
The latest breakdown came as Edinburgh Council held an information event to inform passengers about ticket buying with a parked tram open to board in St Andrew Square from noon until 2pm.
Tom Norris, Edinburgh Trams Director and General Manager, said: “ Unfortunately a fault occurred with one of our tram vehicles which led to some traffic congestion on Princes Street for a spell this morning.
“Engineers were on site quickly and the tram was moved to the Princes Street tram stop as soon as possible to allow traffic to flow again. It is now at the Depot so that the fault can be assessed and fixed.
“We apologise for any disruption caused.”
Ticket inspectors are set to adopt a softly-softly approach as the trams go live – but will be able to issue fines to blatant dodgers from day one.
Discretion will be used, but there will be no relaxation of the rules allowing conductors – or ticket servicing assistants (TSAs) – to begin issuing £10 on-the-spot fines to those who have failed to pay from day one.
A single tram ticket in the city zone will cost £1.50 for an adult and 70p for a child while an airport return will cost £8 for an adult and £4 for a child.