Uchiha Clan Downfall

The Uchiha Clan Massacre was an event that took place five years before the start of the series.

Background
Following the Demon Fox Attack of Konoha, Konoha's leadership began to suspect that an Uchiha was behind the attack. In order to keep an eye on the Uchiha they were forced to live in a small corner of Konoha, creating dissent within the clan. When members of the clan began planning a coup d'état, Itachi Uchiha was tasked with spying on Konoha. Instead, Itachi's pacifistic nature made him become a double agent and provided Konoha with information of the Uchiha. Hiruzen Sarutobi tried to open negotiations with the Uchiha, but time ran out and Hiruzen's advisers ordered Itachi to wipe out his clan.

Prior to the massacre, Itachi confronted Madara Uchiha, who had infiltrated the village. Madara, having decades earlier been shunned by the clan, still held some resentment. Itachi offered Madara the chance to help him wipe out the clan, in exchange for promising not to attack Konoha, a deal which Madara accepted.

Attack
In one night, Itachi, with Madara's help, killed every member of the Uchiha clan, apparently killing his own parents last. Itachi's younger brother, Sasuke Uchiha, returned that night to find Uchiha corpses littering the streets. When he found Itachi standing over their parents' bodies, he realized what had happened and tried to run. 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 discovered they would have a small fight. Sasuke activates his Sharingan but is still no match for Itachi.

In reality, Itachi was defying orders by not killing Sasuke, 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 the Third Hokage to look out for Sasuke and to never disclose the truth of the events surrounding the massacre. Itachi also threatened Konoha's leadership, and Danzo 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 organization until the day that Sasuke would come looking for him.

Aftermath
Sasuke, unaware of the truth behind the attack, would strive for power from that point further. That lead 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. Madara 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, Sasuke resolved to destroy Konoha to avenge the tragic lives both he and Itachi led.

Aside from Itachi Uchiha, Hiruzen Sarutobi, Danzo, Homura Mitokado, and Koharu Utatane, nobody was supposed to know the true meaning of the massacre, and was supposed to think that Itachi has turned rogue due to losing faith in the clan. However, Madara Uchiha, being an accomplice to Itachi, knew about it, and in turn he told Sasuke Uchiha, Naruto Uzumaki, Kakashi Hatake, and Tenzo. Under Kakashi's suggestion, he told Naruto and Tenzo to not tell anyone else about this, as Konohagakure is currently rebuilding, and they don't need any of this to hinder it, unless they can gain evidence that Madara is telling the truth.