Uchiha Clan Downfall

The Uchiha Clan Massacre, also called the and the, took place four years before the start of the series in Konohagakure, bringing forth the demise of the Uchiha clan.

Background
Following the Nine-Tails' attack on Konoha orchestrated by Tobi, Konoha's leadership began to suspect that an Uchiha was behind the attack as the Sharingan possessed the ability to control the Nine-Tailed Demon Fox and put them under close surveillance from that point onwards.

According to Tobi, the Uchiha were all forced to live in a corner of the village and felt as though they had been segregated from the rest of the village. The constant suspicion, and discrimination that would ensue, gave birth to feelings of ill-will, and ultimately rekindled the clan's feelings of hatred towards the Senju-influenced government. In planning the coup d'état, they entrusted Itachi Uchiha who was an ANBU, to be their spy. However, a pacifist by nature, Itachi knew that a civil war would result into another Shinobi World War and instead provided Konoha with information on the Uchiha's plans.

Though the Third Hokage Hiruzen Sarutobi, who did not agree with the treatment being dealt to the Uchiha, attempted to achieve a peacefully resolution with the clan, Danzō Shimura — who was not one to wait around for peaceful negotiations — convinced Itachi that slaughtering his entire clan was the only way to avert, promising that his younger brother Sasuke Uchiha would be spared.

The Uchiha clan, however, was not completely ignorant of Itachi's double-agent status and began to suspect him due to his strange behaviour since joining the ANBU, and asked his close friend Shisui Uchiha to keep an eye on him. However, Shisui was also against the coup d'etat like Itachi, and attempted to stop his kin with his Mangekyō Sharingan's strongest technique, but Danzō Shimura stole his right eye, bent on protecting the village in his own way. Fearing that Danzō would get his remaining eye, Shisui entrusts it to Itachi. Soon after, covering up the nature of Shisui's death as a suicide, Itachi is accused of murder and loses the trust of several of its members. Regardless, Itachi allowed them to believe that as he becomes more distant from his kin. Even Fugaku, the clan's leader, and Itachi's father who defended his son of being accused, seemingly washed his hands of Itachi, unable to understand his son any more.

According to Itachi's recounting to Sasuke, Itachi met with Tobi, whom he believed to be Madara Uchiha. As Madara was ostracised by the clan for causing unrest during the first days of Konoha's formation, Itachi claims to have allowed him to aid in the slaughter in return to leave the rest of Konoha and Sasuke be. It was also during this time that Tobi met with Danzō; the circumstances and content of this meeting are unknown.

Attack
On the night of the slaughter, apparently with Tobi's help, Itachi proceeds to murder every member of the Uchiha clan until only his parents remain. Hesitating before killing them, Itachi learns his parents loved and respected him despite his choice to side with the village over his clan and that their final wish, was for Itachi to take care of Sasuke.

When Sasuke returned that night late from his own training, finding his kin's corpses littering the streets, he finds Itachi standing over their parents' bodies and demands to know what he has done. Intending to have Sasuke kill him as payment for his crime, Itachi used Tsukuyomi on Sasuke to make him think that he alone murdered their clan in cold blood. Claiming to have spared him as he was not worth killing, Itachi convinces Sasuke to live a life of vengeance. Sasuke activated his Sharingan for the first time and chased after Itachi, managing to knock off his forehead protector. Itachi wept as he picked it up, before Sasuke falling unconscious and taking his leave. Sasuke was greatly traumatised by the experience and did not remember awakening his Sharingan.

Aftermath
Before leaving Konoha, Itachi asked Hiruzen to protect Sasuke from Danzō and the other two elders Koharu and Homura, and to never disclose the truth of the events surrounding the massacre. He also made it a point to threaten Danzō as well with the threat of leaking information on Konoha to enemy villages, should he ever lay a hand on Sasuke. Soon after leaving, Itachi joined the Akatsuki to keep Konoha safe from the organisation until the day that Sasuke would come looking for him. Aside from Itachi and Konoha's elders knowing the truth, the official story the latter made up was that Itachi turned rogue due to losing faith in the clan.

The attack had a immense psychological effect on Sasuke, who woke up in the hospital with no memories after Itachi's speech and unable to utilise the Sharingan until five years later after becoming a member of Team 7. However, despite feeling that there was more to the event then he knew, it motivated Sasuke to strive to gather enough power to kill Itachi, ultimately leading him to Orochimaru whose guidance enables Sasuke to obtain the means. However, after Itachi's death, Sasuke learns the truth of the massacre from Tobi. Crushed by this revelation, despite that the Uchiha clan's actions would have destroyed the village, themselves and many others beyond village borders, and driven by the his clan's hatred, Sasuke resolved to destroy Konoha to avenge the tragic lives both he and Itachi led, and to purify the clan's name by severing his ties with the village and the "corrupted shinobi world" that shunned it. The drive is furthered when Danzō admits his role in the massacre yet claimed to have no reason to hide it any longer if Sasuke found out the truth.

Tobi later revealed the truth of the Uchiha Massacre to Naruto Uzumaki, Kakashi Hatake, and Yamato. However, with no evidence behind Tobi's words, Kakashi suggested to Naruto and Yamato to keep the information to themselves so as not to hinder Konoha while being rebuilt after Pain's invasion of the village. A reincarnated Itachi, upon learning that Naruto had also come to know the truth, asked him not to reveal the truth so that the Uchiha clan name can maintain its honour. Kabuto Yakushi, being an experienced deep cover agent, revealed that he too knew the truth behind the incident.