Uchiha Clan Downfall

The Uchiha Clan Massacre, also called the and the, took place five years before the start of the series in Konohagakure, bringing forth the literal and figurative 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 because of the Sharingan's ability to control the Nine-Tailed Demon Fox. In order to keep an eye on the Uchiha, Tobi claimed they were forced to live in a corner of the village and kept under surveillance, creating dissent within the clan. When members of the clan began planning a coup d'état, they tasked Itachi Uchiha with spying on Konoha from within the ANBU. However, Itachi's pacifistic nature led him to become a double agent, instead providing Konoha with information on the Uchiha. He knew that if the suppressed, but powerful, Uchiha were to attack Konoha, the resulting civil war would weaken the village in all aspects. This sign of weakness would entice other countries to take advantage and invade Konoha, with the conflict eventually escalating into another Shinobi World War. As the Uchiha came closer to a village-wide revolt, the Third Hokage attempted to open negotiations with them. Unfortunately, time ran out and Hiruzen's advisers ordered Itachi to slaughter his entire clan.

Prior to the massacre, Itachi confronted Tobi, who had infiltrated the village. Believing Tobi to be Madara, who had decades earlier been shunned by the clan, still held resentment for both the Uchiha and Konoha, Itachi offered Tobi the chance to help him take his revenge against the clan, in exchange for promising not to attack Konoha, a deal which Tobi accepted. It was also during this time that Tobi met with Danzō Shimura; the circumstances of this meeting are unknown as they did not meet again until after the Kage Summit.

The Uchiha clan, however, was not completely blind towards Itachi's double-agent status. They began to suspect him, several months after Itachi had joined the ANBU, due to his change in behaviour. They ordered Shisui Uchiha, Itachi's closest friend, to keep an eye on him, however Shisui later turned up dead, seemingly committing suicide by drowning. The clan suspected that Itachi may have had something to do with this death, including the possibility of having forged the suicide note. Because of this, along with Itachi acting as though entering the ANBU was nothing special, the clan began to become antagonistic towards Itachi. Indeed Itachi had murdered Shisui in order to obtain his Mangekyō Sharingan and had forged the suicide note. However, he denied involvement at the time, and due to his mission of stopping the rebellion being secret, he instead acted disrespectful towards his clansmen, as though he was beginning to lose faith with the clan's incessant need for their rules and regulations. It was later revealed that Itachi did not in fact murder Shisui, but instead aided him in his orchestrating his death, as Shisui was also a firm believer in maintaining the peace and prosperity of the village. Even Fugaku Uchiha, the clan head and Itachi's father, had lost hope in Itachi altogether, and the two had a falling out.

When Itachi revealed to Sasuke the true events of the Uchiha massacre with his Sharingan it was further revealed that Itachi's parents loved and respected him despite his choice to side with the village over his clan and that their final wish to Itachi was for him to take care of Sasuke. Itachi then gently stabbed his parents on the back with his katana, killing them.

Attack
In one night, Itachi, with Tobi's help, killed every member of the Uchiha clan, killing his own parents last. Itachi's younger brother, Sasuke, returned that night late from his own training to find Uchiha corpses littering the streets. When he found Itachi standing over their parents' bodies, Sasuke demanded to know who had done such horrible deeds, but was interrupted as Itachi threw a shuriken at his shoulder, calling him foolish. Itachi then used Tsukuyomi on Sasuke which showed him that Itachi was the one who murdered the clan. Realising what had happened, Sasuke tried to run away. Itachi stopped him and told him he was not worth killing, instead encouraging him to get strong enough to take revenge, even though Sasuke later remembered they had a small fight, which activated Sasuke's Sharingan for the first time, and ended with Sasuke losing and Itachi defecting from the village with tears in his eyes.

In reality, Itachi was obeying Danzō's orders by killing his clan which would mean his brother, Sasuke would be spared, his brother's life meaning more to him than anything. He hoped that by sparing Sasuke and making him live a life of vengeance, Sasuke would someday kill him to avenge their family. He asked Hiruzen to look out for Sasuke and to never disclose the truth of the events surrounding the massacre. Itachi also threatened the Konoha Council, and Danzō in particular, not to lay a finger on Sasuke or else risk him going public with everything he knew. Itachi left the village and joined Akatsuki to keep Konoha safe from the organisation until the day that Sasuke would come looking for him.

Aftermath
The attack had a huge emotional effect on Sasuke, which changed him. Unaware of the truth behind the attack, he would strive for power from that point further, in order to become strong enough to kill Itachi. That led him to seeking out Orochimaru at the end of Part I. Under Orochimaru's guidance, Sasuke was able to gain the strength he needed, and during Part II he was able to bring about Itachi's death (though Itachi was already afflicted by near-blindness and a terminal illness, and was never intending to kill Sasuke in the first place). Tobi confronted him immediately afterwards and informed him of Itachi's real reasons for wiping out the Uchiha. Crushed by this revelation and the fact that Konoha enjoyed peace at the expense of the entire Uchiha clan, despite the fact that the latter's actions would have irrevocably destroyed that peace, Sasuke resolved to destroy Konoha to avenge the tragic lives both he and Itachi led, and to purify the clan's name by severing bonds with the village that shunned it.

Aside from Itachi Uchiha and Konoha's elders, nobody else was supposed to know the true purpose of the massacre and the world was supposed to think that Itachi has turned rogue due to losing faith in the clan. However, Tobi also knew the truth behind the event which surprised Itachi when he found out (though he also admitted that he had a suspicion that Tobi knew the truth). Tobi, in turn, told Sasuke, Naruto Uzumaki, Kakashi Hatake, and Yamato the truth of the events. However, Kakashi suggested to Naruto and Yamato that they should not repeat what Tobi said to anyone yet, as Konohagakure is currently rebuilding, and they don't need any of this to hinder it, unless they can gain evidence that Tobi is telling the truth, as they themselves have difficulty in believing most of it. When Sasuke confronted Danzō, the elder confirmed that Itachi was really ordered to wipe out the Uchiha Clan, thus securing Sasuke's desire to destroy the village. Danzō also claimed that if Akatsuki found out the truth, then there was no further need for him to hide it. When Naruto told a revived Itachi of the fact that he knew the truth, Itachi told Naruto not to tell anyone else as he wanted his clan's name to maintain its honour. Kabuto Yakushi, being a spy who is well informed of all the goings-on, revealed that he too knew the truth.