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, as the Sharingan was the only means of controlling the Nine-Tailed Demon Fox. 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, and increasing the hatred that have been planted since Tobirama Senju had created the Konoha Military Police Force to keep the Uchiha from governing the village.

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, knowing that if the Uchiha attacked the village, it would create weakness within the state, causing other countries to take advantage and lead to the Fourth Great Shinobi World War. Hiruzen Sarutobi tried to open negotiations with the Uchiha, but time ran out and Hiruzen's advisers went behind his back and 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. Also, around the time of the massacre, Madara met with Danzō Shimura, but haven't seen each other since until after Danzō fled from the Kage summit.

The Uchiha clan were not completely blind towards Itachi's double agent status. They suspected him of acting weird about half a year after joining the ANBU. They sent Shisui Uchiha, Itachi's closest friend, to keep an eye on him, but Shisui ended up seemingly committing suicide by drowning. The clan suspected that Itachi had something to do with this death, including the possibility of forging the suicide note. Because of this, along with Itachi acting as though entering the ANBU was nothing special, the clan becomes antagonistic towards Itachi. Indeed, Itachi had murdered Shisui to obtain his Mangekyō Sharingan and forged the suicide note. However, he denied it at the time, and due to his mission of stopping the revolution being secret, he acted as though he was losing faith towards the clan due to them being bound to rules and bonds, and started to disrespect everyone. Even Fugaku, 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, 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 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 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 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 affect on Sasuke, creating his outcastic, quiet, and stern nature. 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. 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, Danzō Shimura, 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 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 Madara's version of the massacre to be true. Danzō also claimed that if Akatsuki found out the truth, then there was no further need for him to hide it.