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Ensoñación vs. ensueño

In Spanish, the words ensoñación and ensueño share the same root related to dreaming, but they are used differently. Generally, ensoñación refers to the psychological state or process of the mind wandering (reverie), while ensueño refers to the content of the fantasy, an illusion, or something that possesses a dreamlike perfection.

Ensoñación

C2
This word is more formal and specific to the mental act of daydreaming. It describes a state of abstraction where a person is awake but detached from reality, immersed in their own thoughts or fantasies.
La música suave la sumergió en una profunda ensoñación.
(The soft music immersed her in a deep daydream.)
Es propenso a la ensoñación y a menudo olvida dónde pone las llaves.
(He is prone to daydreaming and often forgets where he puts his keys.)
Sus momentos de ensoñación son su escape de una rutina aburrida.
(Her moments of reverie are her escape from a boring routine.)
El poeta escribió los versos en un estado de ensoñación melancólica.
(The poet wrote the verses in a state of melancholic daydreaming.)
Salir de esa ensoñación le tomó varios minutos.
(Snapping out of that daydream took him several minutes.)

Ensueño

C1
While this can also mean a daydream, it is frequently used to describe an illusion, a specific fantasy, or an event so beautiful it feels like a dream. It is often used to describe things that are idyllic or perfect.
La boda fue un evento de ensueño que nunca olvidarán.
(The wedding was a dreamlike event they will never forget.)
Vivir en esa isla tropical es un ensueño para muchos turistas.
(Living on that tropical island is a fantasy for many tourists.)
Todo pareció un dulce ensueño hasta que sonó el teléfono.
(Everything seemed like a sweet illusion until the phone rang.)
Ella decoró su habitación para que fuera un lugar de ensueño.
(She decorated her room to be a place of dreams.)
Tu propuesta de negocio suena a puro ensueño sin base real.
(Your business proposal sounds like pure fantasy with no real basis.)

Summary

Use ensoñación when you want to describe the mental activity or the state of being lost in thought (the act). Use ensueño when you want to describe a specific illusion, a fantasy, or an object/place that is magically perfect (the content or quality).