On October 23, 1956, a Budapest student rally in support of Polish efforts to win autonomy from the Soviet Union sparked mass demonstrations. The police attacked, and the demonstrators fought back, tearing down symbols of Soviet domination and HWP rule, sacking the party newspaper's offices and shouting in favor of free elections, national independence, and the return of Imre Nagy to power. Erno Gero (Soviet Party leader in Hungary) called out the army, but many soldiers handed their weapons to the demonstrators and joined the uprising . Soviet officials in Budapest summoned Nagy to speak to the crowd, but the violence continued. At Gero's request, Soviet troops entered Budapest on October 24. The presence of these troops further enraged the Hungarians, who battled the troops and state security police. Crowds emptied the prisons, freed Cardinal Mindszenty, sacked police stations, and summarily hanged some member of the secret police. The Central Committee named Nagy prime minister on October 25 and selected a new Politburo and Secretariat; one day later, Janos Kadar replaced Gero as party first secretary.

Nagy enjoyed vast support. He formed a new government consisting of both communists and noncommunists, dissolved the state security police, abolished the one-party system, and promised free elections and an end to collectivization, all with Kadar's support. But Nagy failed to harness the popular revolt. Workers' councils threatened a general strike to back demands for removal of Soviet troops, elimination of party interference in economic affairs, and renegotiation of economic treaties with the Soviet Union. On October 30, Nagy called for the formation of a new democratic, multiparty system. Noncommunist parties that had been suppressed almost a decade before began to reorganize. A coalition government emerged that included members of the Independent Smallholders' Party, Social Democratic Party, National Peasant Party, and other parties, as well as the HWP. After negotiations, Soviet officials agreed to remove their troops at the discretion of the Hungarian government, and Soviet troops began to leave Budapest. Nagy soon learned, however, that new Soviet armored divisions had crossed into Hungary.

In response, on November 1 Nagy announced Hungary's decision to withdraw from the Warsaw Pact and to declare Hungary neutral. He then appealed to the United Nations and Western governments for protection of Hungary's neutrality. The Western powers, which were involved in the Suez crisis and were without contingency plans to deal with a revolution in Eastern Europe, did not respond.

The Soviet military responded to Hungarian events with a quick strike. On November 3, Soviet troops surrounded Budapest and closed the country's borders. Overnight they entered the capital and occupied the National Assembly building. Kadar, who had fled to the Soviet Union on November 2, assembled the Temporary Revolutionary Government of Hungary on Soviet soil just across the Hungarian border. On November 4, the formation of the new government was announced in a radiobroadcast. Kadar returned to Budapest in a Soviet armored car; by then, Nagy had fled to the Yugoslav embassy, Cardinal Mindszenty had taken refuge in the United States embassy, Rakosi was safely across the Soviet border, and about 200,000 Hungarians had escaped to the West.

With Soviet support, Kadar struck almost immediately against participants in the revolution. Over the next five years, about 2,000 individuals were executed and about 25,000 imprisoned. Kadar also reneged on a guarantee of safe conduct granted to Nagy, who was arrested on November 23 and deported to Romania. In June 1958, the Hungarian government announced that Nagy and other government officials who had played key roles in the revolution had been secretly tried and executed.