Uchiha Clan Downfall

The Uchiha clan Massacre took place five years before the start of the series, bringing forth the literal and figurative demise of the Uchiha clan.

Background
Following the Nine-Tails' Attack on Konoha orchestrated by Madara Uchiha, 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, Madara claimed 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 from within the ANBU. However, Itachi's pacifistic nature led him to become a double agent, instead providing Konoha with information on the Uchiha, knowing that if the suppressed, but powerful, Uchiha were to attack Konoha, the resulting full-blown civil war, and the weakness it would cause within the village, would cause other countries to take advantage and lead to another Great Shinobi World War. As the Uchiha came closer and closer to a village-wide revolt, Hiruzen Sarutobi attempted to open negotiations with them, but unfortunately time had run out, and Hiruzen's advisers ordered Itachi to kill off his own 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 resentment for both the Uchiha and Konoha. Itachi offered Madara the chance to help him take his revenge against the clan, in exchange for promising not to attack Konoha, a deal which Madara accepted. It was also during this time that Madara met with Danzō Shimura; the circumstances of this meeting are unknown as they did not meet again until 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 behavior. They sent Shisui Uchiha, Itachi's closest friend, to keep an eye on him, however Shisui later turned up 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 revolution being secret, he instead acted disrespectful towards everyone, as though he was beginning to lose faith with the clan's incessant need for rules and bonds. Even Fugaku Uchiha, the clan head and Itachi's father, had lost hope in Itachi altogether, and the two had a falling out.

Attack
In one night, Itachi, with Madara's help, killed every member of the Uchiha clan, killing his own parents last. Itachi's younger brother, Sasuke Uchiha, returned that night late from his own training 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 remembered they had a small fight, which activated Sasuke's Sharingan, that ended with Sasuke losing and Itachi leaving the village.

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 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 organization until the day that Sasuke would come looking for him.

Aftermath
The attack had a huge emotional effect on Sasuke by greatly altering his personality. 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 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 (though Itachi was already afflicted by near-blindness and a terminal illness, and was never intending to kill Sasuke in the first place). Madara confronted him immediately afterward 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 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 Yamato. The rest of Taka would also know about it from Sasuke. However, Kakashi suggested to Naruto and Yamato that they should not repeat what Madara 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 Madara is telling the truth, as they themselves have difficulty in believing most of it. When Sasuke confronted Danzō, the elder confirmed that Itachi had worked for Konoha to defeat the Uchiha Clan when they attempted the coup d'etat. Danzō also claimed that if Akatsuki found out the truth, then there was no further need for him to hide it.