Crete's position in the centre of the eastern Mediterranean made it a key strategic asset during the Second World War. For the Allies it offered potential as a base for operations in the Balkans, and for the Germans, a base for operations against North Africa. Britain had established a garrison on the island in November 1940, but few preparations had been made for its defence by the time the German conquest of Greece in April 1941 placed it under dire threat. The garrison was hastily strengthened with troops evacuated from Greece but they lacked vehicles, artillery and other heavy weapons. The defenders' predicament was further complicated by the geography of the island - all of its major towns, airfields and port facilities were located on the north coast - and the Germans' control of the air almost completely negated Britain's naval strength in the eastern Mediterranean. The island's defence was based around three main defended areas: Heraklion and Retimo, each the site of an airfield, and the Canea-Suda Bay area, which contained the port facilities at Suda and the airfield at Maleme. The Australian units that formed part of the defending force were: the 2/2nd and 2/3rd Field Regiments, the 2/1st, 2/4th, 2/7th, 2/8th, 2/11th, 16th Brigade Composite and 17th Brigade Composite Battalions, a battery of the 2/3rd Light Anti-Aircraft Regiment, and several composite groups of miscellaneous Australian troops.

In an operation codenamed "Merkur" (Mercury) over 9,500 German airborne troops landed on Crete on 20 May 1941, their main objectives being the three airfields. They initially suffered heavily at the hands of the defenders but, although held at bay at Retimo and Heraklion, they managed to take control of Maleme airfield by the night of 21 May. This allowed large numbers of German reinforcements to be flown in and begin pushing the Allied forces back towards Canea. On 24 May, continuing pressure from the Luftwaffe forced the British naval forces to withdraw from the waters north of Crete allowing the movement of German shipping from Greece, which had hitherto been prevented. On 27 May, orders were given to evacuate the island and the forces in the Canea-Suda Bay area commenced a withdrawal across the island to the south-coast village of Sphakia. Over 12,000 Allied troops were evacuated from Sphakia over four nights, beginning on 28 May. The withdrawal in the west sealed the fate of the garrisons at Retimo and Heraklion, which had both effectively defeated the Germans. The Heraklion force was evacuated by sea on the night of 28 May, but, surrounded by troops advancing from Canea, the Retimo force was forced to surrender on 29 May.

The ill-fated battle for Crete cost the British Commonwealth forces 1,742 killed and 2,225 wounded. Another 11,370 troops were taken prisoner - persistent German air attacks and unsustainable naval losses had caused the Sphakia evacuation to be abandoned prematurely. The Royal Navy lost nine ships around Crete and over 2,000 sailors were killed. Operation "Merkur" had likewise proved costly for the Germans who suffered close to 7,000 fatal casualties.