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The Persians were dissatisfied with the royalty terms of the British petroleum concession, the Anglo-Persian Oil Company (APOC), whereby Persia received 16% of "net profits". Led by Mossadegh, political parties and opponents of the Shah's policies banded together to form a coalition known as the National Front. Oil nationalization was a major policy goal for the party.

By 1951, the National Front had won majority seats for the popularly elected Majlis (Parliament of Iran). According to Iran's constitution, the majority elected party in the parliament would give a vote of confidence for its prime minister candidate, after which the Shah would appoint the candidate to power. The Prime Minister Haj Ali Razmara, who opposed the oil nationalization on technical grounds, was assassinated by the hardline Fadaiyan e-Islam (whose spiritual leader the Ayatollah Abol-Qassem Kashani, a mentor to the future Ayatollah Ruhollah Khomeini, had been appointed Speaker of the Parliament by the National Front).

After a vote of confidence from the National Front dominated Parliament, Mossadegh was appointed prime minister of Iran by the Shah. Mossadegh had sought to reduce the semi-absolute role of the Shah granted by the Constitution of 1906, thus making Iran a full democracy, and to nationalize the Iranian oil industry, consisting of vast oil reserves and the Abadan Refinery, both owned by the Anglo-Iranian Oil Company, a British corporation (now BP). Britain now faced the newly elected nationalist government in Iran where Mossadegh, with strong backing of the Iranian parliament and people, demanded more favorable concessionary arrangements, which Britain vigorously opposed.

The National Iranian Oil Company suffered decreased production, because of Iranian inexperience and the AIOC's orders that British technicians not work with them, thus provoking the Abadan Crisis that was aggravated by the Royal Navy's blockading its export markets to pressure Iran to not nationalise its petroleum. The Iranian revenues were greater, because the profits went to Iran's national treasury rather than to private, foreign oil companies. By September 1951, the British had virtually ceased Abadan oil field production, forbidden British export to Iran of key British commodities (including sugar and steel), and had frozen Iran's hard currency accounts in British banks. The British blockade of Iranian seaports meant that Iran was left without access to markets where it could sell its oil. The embargo had the effect of causing Iran to spiral into bankruptcy. Tens of thousands had lost their jobs at the Abadan refinery, and although most understood and passionately supported the idea of nationalisation, they naturally hoped that Mosaddegh would find a way to put them back to work. The only way he could do that was to sell oil."

The United Kingdom took its anti-nationalisation case against Iran to the International Court of Justice at The Hague; PM Mosaddegh said the world would learn of a "cruel and imperialistic country" stealing from a "needy and naked people". Representing the AIOC, the UK lost its case. Nevertheless, the British continued to enforce the embargo of Iranian oil. In August 1952, Iranian Prime Minister Mosaddegh invited an American oil executive to visit Iran and the Truman administration welcomed the invitation. However, the suggestion upset Churchill who insisted that the U.S. not undermine his campaign to isolate Mosaddegh: "Britain was supporting the Americans in Korea, he reminded Truman, and had a right to expect Anglo-American unity on Iran.

However, the Speaker of the Parliament Ayatollah Kashani, Mossadegh's main clerical supporter, became increasingly opposed to the Prime Minister, because Mossadegh was not turning Iran into an Islamic state. By 1953, he had completely turned on him, and supported the coup, depriving Mossadegh of religious support, while giving it to the Shah. Economic tensions caused by the British embargo and political turmoil began to take a major toll upon Mossadegh's popularity and political power. The people were increasingly blaming him for the economic and political crisis. Political violence was becoming widespread in the form of street clashes between rival political groups. Mossadegh was losing popularity and support among the working class which had been his strongest supporters.

By mid-1953 a mass of resignations by Mossadegh's parliamentary supporters reduced the National Front seats in Parliament. A referendum to dissolve parliament and give the prime minister power to make law was submitted to voters, and it passed with 99.9 percent approval, 2,043,300 votes to 1300 votes against. The referendum was widely seen by opponents as a dictatorial act, and the Shah and the rest of the government were effectively stripped of their powers to rule. When Mossadegh dissolved the Parliament, his opponents decried this act because he had effectively given himself "total power". Ironically, this seemingly un-democratic act by a democratically elected prime minister would result in a chain of events leading to his downfall.

The US was becoming increasingly wary of Iran. U.S. reluctance to overthrow Prime Minister Mossadegh in 1951, when he was elected, faded 28 months later when Dwight D. Eisenhower was in the White House and John Foster Dulles took the helm at theState Department. "Anglo-American cooperation on that occasion brought down the Iranian prime minister and reinstated a U.S.-backed shah." (Harry Truman, the previous president, had refused demands by the British and international oil companies to carry out the coup).

Britain and the U.S. selected Fazlollah Zahedi to be the prime minister of a military government that was to replace Mosaddegh as premier. The Central Intelligence Agency bribed street thugs, clergy, politicians and Iranian army officers to take part in a propaganda campaign against Mosaddegh and his government. During the coup, Roosevelt and Wilber, representatives of the Eisenhower administration, bribed Iranian government officials, reporters, and businessmen. They also bribed street thugs to support the Shah and oppose Mosaddegh. The CIA gave Zahedi about $100,000 before the coup and an additional $5 million the day after the coup to help consolidate support for the coup. The US government gave Zahedi a further $28 million a month later, and that another $40 million was given in 1954 after the Iran government signed the oil consortium deal. Classified documents show British intelligence officials played a pivotal role in initiating and planning the coup, and that AIOC contributed $25,000 towards the expense of bribing officials.

Farmans (royal decrees) dismissing Mosaddegh and appointing Zahedi (a loyalist who had helped Reza Shah reunify Iran decades earlier) were drawn up by the coup plotters and signed by the Shah. General Zahedi, met with the pro-Shah Ayatollah Mohammad Behbahani and other Shah supporters in secret. There (using CIA money deridingly known as "Behbahani dollars"), they quickly created a new plan. The Ayatollah Behbahani also used his influence to rally religious demonstrators against Mossadegh. Ayatollah Kashani had completely turned on Mossadegh and supported the Shah, by this point

In 2000, James Risen at The New York Times obtained the previously secret CIA version of the coup written by Wilber and summarized its contents, which includes the following:

1. In early August, the C.I.A. stepped up the pressure. Iranian operatives pretending to be Communists threatened Muslim leaders with savage punishment if they opposed Mossadegh, seeking to stir anti-Communist sentiment in the religious community.
2. In addition, the secret history says, the house of at least one prominent Muslim was bombed by C.I.A. agents posing as Communists. It does not say whether anyone was hurt in this attack.
3. CIA agents were planting rumors in the Iranian press about Mossadegh being of Jewish parentage, being a Communist or Communist fellow traveler, having secret sympathies for the British, and having designs on the throne 
4. The agency was also intensifying its propaganda campaign. A leading newspaper owner was granted a personal loan of about $45,000, in the belief that this would make his organ amenable to our purposes.

The first attempt failed on Saturday, August 15; CIA headquarters twice ordered him to leave Tehran, but Roosevelt remained and organized a second coup on Wednesday, August 19. Roosevelt was able to use the U.S. ambassador in Tehran, Loy Henderson, to deceive Mossadegh into ordering the people to stay home and calling in the armed forces to bring calm to the streets. Having secretly organized paid mobs, and having already secured the support of high-ranking Shia clerics (Ayatollah Kashani, Ayatollah Behbahani, Hojatolislam Falsafi) and the radical group Fadaian Islam, who brought their followers into the streets, Roosevelt then had one group of military officers attack Mossadegh’s home and another take over the Tehran radio station. Roosevelt’s leadership was the single most significant factor in the success of the August 19 coup; without him, there would have been no second coup. Under Zahedi's authority, the army stormed all government buildings with the support of demonstrators. Mossadegh fled after a tank fired a single shell into his house, but he later turned himself in to the army's custody. To prevent further bloodshed, he refused a last attempt to organize his supporters. By the end of the day, Zahedi and the army were in control of the government. The second person who spoke on Radio Tehran announcing and celebrating the overthrow of Mossadegh was Ayatollah Kashani’s son, who was hand-picked by Kermit Roosevelt, the CIA Operative in Tahran.

As a condition for restoring the Anglo-Iranian Oil Company, in 1954 the U.S. required removal of the AIOC's monopoly; five American petroleum companies, Royal Dutch Shell, and the Compagnie Française des Pétroles, were to draw Iran's petroleum after the successful coup d'état—Operation Ajax. The Shah declared this to be a "victory" for Iranians, with the massive influx of money from this agreement resolving the economic collapse from the last three years, and allowing him to carry out his planned modernization projects.