On 7 January 1978, an article ("Iran and Red and Black Colonization") appeared in the national daily Ettela'at newspaper. Written under a pseudonym by a government agent, it denounced Khomeini as a "British agent" and a "mad Indian poet" conspiring to sell out Iran to neo-colonialists and communists. Upon the publishing of the article, religious seminary students in the city of Qom, angered over the insult to Khomeini, clashed with police. According to the government, two were killed in the clash; according to the opposition, seventy were killed and over five hundred were injured. However, the casualty figures are different in different sources.
According to the Shi'ite customs, memorial services (referred to as chehelom) are held forty days after a person's death. Encouraged by Khomeini (who declared that the blood of martyrs must water the "tree of Islam"), radicals pressured the mosques and moderate clergy to commemorate the deaths of the students, and used the occasion to generate protests. The informal network of mosques and bazaars, which for years had been used to carry out religious events, increasingly became consolidated as a coordinated protest organization. On 18 February, forty days after Qom clashes, demonstrations broke out in various different cities. The largest was in Tabriz, which descended into a full-scale riot. "Western" and government symbols such as cinemas, bars, state-owned banks, and police stations were set ablaze. Units of Imperial Iranian Army were deployed to the city to restore order, and the death toll, according to government was six, while Khomeini claimed hundreds were "martyred".
A series of escalating protests broke out in major cities, and deadly riots broke out in Isfahan where protesters fought for the release of Ayatollah Jalaluddin Taheri. Martial law was declared in the city on 11 August as symbols of Western culture and government buildings were burned, and a bus full of American workers was bombed. Due to his failure to stop the protests, Prime Minister Amuzegar offered his resignation.
The Shah increasingly felt that he was losing control of the situation and hoped to regain it through complete appeasement. He decided to appoint Jafar Sharif-Emami to the post of prime minister, himself a veteran prime minister. Emami was chosen due to his family ties to the clergy, but he had a reputation of corruption during his previous premiership. Under the Shah's guidance, Sharif-Emami effectively began a policy of "appeasing the opposition's demands before they even made them".
4 September was Eid-e-Fitr, the holiday celebrating the end of the month of Ramadan. A permit for an open air prayer was granted, in which 200,000–500,000 people attended. Instead, the clergy directed the crowd on a large march through the center of Tehran (the Shah reportedly watched the march from his helicopter, unnerved and confused). A few days later even larger protests took place, and for the first time protesters called for Khomeini's return and the establishment of an Islamic republic.
At midnight on 8 September, the Shah declared martial law in Tehran and 11 other major cities throughout the country. All street demonstrations were banned, and a night-time curfew was established. Tehran's martial law commander was General Gholam-Ali Oveissi, who was known for his severity against opponents.
On 5 November, demonstrations at University of Tehran became deadly after a fight broke out with armed soldiers. Within hours, Tehran broke out into a full-scale riot. Block after block of Western symbols such as movie theaters and department stores, as well as government and police buildings, were seized, looted, and burned. The British embassy in Tehran was partially burned and vandalized as well, and the American embassy nearly suffered the same fate (the event became known to foreign observers as "The Day Tehran Burned").
On 6 November, the Shah dismissed Sharif-Emami from the post of prime minister, and chose to appoint a military government in its place. The Shah chose General Gholam-Reza Azhari to be prime minister because of his mild-mannered approach to the situation. The cabinet he would choose was a military cabinet in name only and consisted primarily of civilian leaders.
On 2 December 1978, the Muharram protests began. Named for the Islamic month they began in, the Muharram protests were impressively huge and pivotal. Over two million protesters (many of whom were teenagers organized by the mullahs from the mosques of southern Tehran) took to the streets, crowding Shahyad Square. Protesters frequently went out at night, defying the set curfew, often taking to rooftops and shouting "Allahu-Akbar" (God is Great). According to one witness, many of the clashes on the street had an air of playfulness rather than seriousness, with security forces using "kid gloves" against the opposition (nevertheless, the government reported at least 12 opposition deaths).
On 11 December, a dozen officers were shot dead by their own troops at Tehran's Lavizan barracks. Fearing further mutinies, many soldiers were returned to their barracks.Mashhad (the second largest city in Iran) was abandoned to the protesters, and in many provincial towns demonstrators were effectively in control.
The Shah began to search for a new prime minister, one who was a civilian and a member of the opposition. On 28 December, he secured an agreement with another major National Front figure, Shahpour Bakhtiar. Bakhtiar would be appointed prime minister (a return to civilian rule), while the Shah and his family would leave the country for a "vacation". His royal duties would be carried out by a Regency Council, and three months after his departure a referendum would be submitted to the people deciding on whether Iran would remain a monarchy or become a republic. A former opponent of the Shah, Bakhtiar became motivated to join the government because he was increasingly aware of Khomeini's intentions to implement hard-line religious rule rather than a democracy. Karim Sanjabi immediately expelled Bakhtiar from the National Front, and Bakhtiar was denounced by Khomeini (who declared that acceptance of his government was the equivalent of "obedience to false gods").