Iraqi leader Saddam Hussein, who had already tried and failed to draw Coalition troops into costly ground engagements by shelling Saudi Arabian positions and oil storage tanks and firing Scud surface-to-surface missiles at Israel, ordered the invasion of Saudi Arabia from southern Kuwait. The 1st and 5th Mechanized Divisions and 3rd Armored Division were ordered to conduct a multi-pronged invasion toward Khafji, engaging Saudi Arabian, Kuwaiti, and U.S. forces along the coastline, with a supporting Iraqi commando force ordered to infiltrate further south by sea and harass the Coalition's rear.

These three divisions, which had been heavily damaged by Coalition aircraft in the preceding days, attacked on 29 January. Most of their attacks were repulsed by U.S. Marine Corps and U.S. Army forces but one of the Iraqi columns occupied Khafji on the night of 29–30 January. Between 30 January and 1 February, two Saudi Arabian National Guard battalions and two Qatari tank companies attempted to retake control of the city, aided by Coalition aircraft and U.S. artillery. By 1 February, the city had been recaptured at the cost of 43 Coalition servicemen dead and 52 wounded. Iraqi Army fatalities numbered between 60 and 300, while an estimated 400 were captured as prisoners of war.

The Iraqi capture of Khafji was a major propaganda victory for Iraq: on 30 January Iraqi radio claimed that they had "expelled Americans from the Arab territory". For many in the Arab world, the battle of Khafji was seen as an Iraqi victory, and Hussein made every possible effort to turn the battle into a political victory. On the other side, confidence within the United States Armed Forces in the abilities of the Saudi Arabian and Kuwaiti armies increased as the battle progressed. After Khafji, the Coalition's leadership began to sense that the Iraqi Army was a "hollow force" and it provided them with an impression of the degree of resistance they would face during the Coalition's ground offensive that would begin later that month. The battle was felt by the Saudi Arabian government to be a major propaganda victory, which had successfully defended its territory.