On October 31, 1918, smoldering unrest burst into revolution in Budapest, and roving soldiers assassinated Istvan Tisza. Pressured by the popular uprising and the refusal of Hungarian troops to quell disturbances, King Karl was compelled to appoint the "Red Count," Mihaly Karolyi, a pro-Entente liberal and leader of the Party of Independence, to the post of prime minister. Chrysanthemum-waving crowds poured into the streets shouting their approval. Karolyi formed a new cabinet, whose members were drawn from the new National Council, composed of representatives of the Party of Independence, the Social Democratic Party, and a group of bourgeoisie radicals. After suing for a separate peace, the new government dissolved the parliament, pronounced Hungary an independent republic with Karolyi as provisional president, and proclaimed universal suffrage and freedom of the press and assembly. The government launched preparations for land reform and promised elections, but neither goal was carried out. On November 13, 1918, Karl IV surrendered his powers as king of Hungary; however, he did not abdicate, a technicality that made a return to the throne possible.

The Karolyi government's measures failed to stem popular discontent, especially when the Entente powers began distributing slices of Hungary's traditional territory to Romania, Yugoslavia, and Czechoslovakia. The new government and its supporters had pinned their hopes for maintaining Hungary's territorial integrity on abandoning Austria and Germany, securing a separate peace, and exploiting Karolyi's close connections in France. The Entente, however, chose to consider Hungary a partner in the defeated Dual Monarchy and dashed the Hungarians' hopes with the delivery of each new diplomatic note demanding surrender of more land. On March 19, 1919, the French head of the Entente mission in Budapest handed Karolyi a note delineating final postwar boundaries, which were unacceptable to all Hungarians. Karolyi resigned and turned power over to a coalition of Social Democrats and communists, who promised that Soviet Russia would help Hungary restore its original borders. Although the Social Democrats held a majority in the coalition, the communists under Bela Kun immediately seized control and announced the establishment of the Hungarian Soviet Republic.

[notes on Versailles settlement follow]

Hungary's signing of the Treaty of Trianon on June 4, 1920, ratified the country's dismemberment, limited the size of its armed forces, and required reparations payments. The territorial provisions of the treaty, which ensured continued discord between Hungary and its neighbors, required the Hungarians to surrender more than two-thirds of their prewar lands. Romania acquired Transylvania; Yugoslavia gained Croatia, Slavonia, and Vojvodina; Slovakia became a part of Czechoslovakia; and Austria also acquired a small price of prewar Hungarian territory. Hungary also lost about 60 percent of its prewar population, and about one-third of the 10 million ethnic Hungarians found themselves outside the diminished homeland. The country's ethnic composition was left almost homogeneous. Hungarians constituted about 90 percent of the population, Germans made up about 6 to 8 percent, and Slovaks, Croats, Romanians, Jews, and other minorities accounted for the remainder.

New international borders separated Hungary's industrial base from its sources of raw materials and its former markets for agricultural and industrial products. Its new circumstances forced Hungary to become a trading nation. Hungary lost 84 percent of its timber resources, 43 percent of its arable land, and 83 percent of its iron ore. Because most of the country's prewar industry was concentrated near Budapest, Hungary retained about 51 percent of its industrial population, 56 percent of its industry, 82 percent of its heavy industry, and 70 percent of its banks.