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).
In 1978, the government promulgated a new constitution that acknowledged Juan Carlos as rightful heir of the Spanish dynasty and king; specifically, Title II, Section 57 asserted Juan Carlos's right to the throne of Spain by dynastic succession in the Bourbon tradition, as "the legitimate heir of the historic dynasty" rather than as the designated successor of Franco. The Constitution was passed by the democratically elected Constituent Cortes, ratified by the people in a referendum (6 December) and then signed into law by the King before a solemn meeting of the Cortes.
As the days of Tasu'a and Ashura (10 and 11 December) approached, in order to prevent a deadly showdown the Shah began to draw back. In negotiations with Ayatollah Shariatmadari, the Shah ordered the release of 120 political prisoners and Karim Sanjabi, and on 8 December revoked the ban on street demonstrations. Permits were issued for the marchers, and troops were removed from the procession's path. In turn, Shariatmadari pledged that to make sure that there would be no violence during the demonstrations.On 10 and 11 December, the days of Tasu'a and Ashura, between six and nine million anti-shah demonstrators marched throughout Iran.
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.
In December of that year, Nolan Bushnell was fired following an argument with Manny Gerard. "We started fighting like cats and dogs. And then the wheels came off that fall. Warner claimed they fired me," recalled Bushnell. "I say I quit. It was a mutual separation".
In 1978, the Queen endured a state visit to the United Kingdom by Romania's communist leader, Nicolae Ceaușescu, and his wife, Elena though privately she thought they had "blood on their hands".
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").