While Jerusalem had been under Muslim rule for hundreds of years, by the 11th century the Seljuk takeover of the region threatened local Christian populations, pilgrimages from the West, and the Byzantine Empire itself. The earliest initiative for the First Crusade began in 1095 when Byzantine emperor Alexios I Komnenos requested military support from the Council of Piacenza in the empire's conflict with the Seljuk-led Turks. This was followed later in the year by the Council of Clermont, during which Pope Urban II supported the Byzantine request for military assistance and also urged faithful Christians to undertake an armed pilgrimage to Jerusalem.

Jerusalem was reached in June 1099 and the Siege of Jerusalem resulted in the city being taken by assault from 7 June to 15 July 1099, during which its defenders were ruthlessly massacred. The Kingdom of Jerusalem was established as a secular state under the rule of Godfrey of Bouillon, who shunned the title of 'king'. A Fatimid counterattack was repulsed later that year at the Battle of Ascalon, ending the First Crusade. Afterwards the majority of the crusaders returned home.

In 1119, the French knight Hugues de Payens approached King Baldwin II of Jerusalem and Warmund, Patriarch of Jerusalem, and proposed creating a monastic order for the protection of pilgrims.

King Baldwin and Patriarch Warmund agreed to the request, probably at the Council of Nablus in January 1120, and the king granted the Templars a headquarters in a wing of the royal palace on the Temple Mount in the captured Al-Aqsa Mosque. The Temple Mount had a mystique because it was above what was believed to be the ruins of the Temple of Solomon. The Crusaders therefore referred to the Al-Aqsa Mosque as Solomon's Temple, and from this location the new order took the name of Poor Knights of Christ and the Temple of Solomon, or "Templar" knights. The order, with about nine knights including Godfrey de Saint-Omer and André de Montbard, had few financial resources and relied on donations to survive. Their emblem was of two knights riding on a single horse, emphasizing the order's poverty.

The impoverished status of the Templars did not last long. They had a powerful advocate in Saint Bernard of Clairvaux, a leading Church figure, the French abbot primarily responsible for the founding of the Cistercian Order of monks and a nephew of André de Montbard, one of the founding knights. Bernard put his weight behind them and wrote persuasively on their behalf in the letter 'In Praise of the New Knighthood', and in 1129, at the Council of Troyes, he led a group of leading churchmen to officially approve and endorse the order on behalf of the church. With this formal blessing, the Templars became a favoured charity throughout Christendom, receiving money, land, businesses, and noble-born sons from families who were eager to help with the fight in the Holy Land.

The Templars were organized as a monastic order similar to Bernard's Cistercian Order, which was considered the first effective international organization in Europe. The organizational structure had a strong chain of authority. Each country with a major Templar presence (France, Poitou, Anjou, Jerusalem, England, Spain, Portugal, Italy, Tripoli, Antioch, Hungary, and Croatia) had a Master of the Order for the Templars in that region.

There was a threefold division of the ranks of the Templars: the noble knights, the non-noble sergeants, and the chaplains. The Templars did not perform knighting ceremonies, so any knight wishing to become a Knight Templar had to be a knight already. They were the most visible branch of the order, and wore the famous white mantles to symbolize their purity and chastity. They were equipped as heavy cavalry, with three or four horses and one or two squires. Squires were generally not members of the order but were instead outsiders who were hired for a set period of time. Beneath the knights in the order and drawn from non-noble families were the sergeants. They brought vital skills and trades from blacksmiths and builders, including administration of many of the order's European properties. In the Crusader States, they fought alongside the knights as light cavalry with a single horse. Several of the order's most senior positions were reserved for sergeants, including the post of Commander of the Vault of Acre, who was the de facto Admiral of the Templar fleet. The sergeants wore black or brown. From 1139, chaplains constituted a third Templar class. They were ordained priests who cared for the Templars' spiritual needs. All three classes of brother wore the order's red cross.

At the Council of Pisa in 1135, Pope Innocent II initiated the first papal monetary donation to the Order. Another major benefit came in 1139, when Innocent II's papal bull Omne Datum Optimum exempted the order from obedience to local laws. This ruling meant that the Templars could pass freely through all borders, were not required to pay any taxes, and were exempt from all authority except that of the pope.

Though initially an Order of poor monks, the official papal sanction made the Knights Templar a charity across Europe. Further resources came in when members joined the Order, as they had to take oaths of poverty, and therefore often donated large amounts of their original cash or property to the Order. Additional revenue came from business dealings. Since the monks themselves were sworn to poverty, but had the strength of a large and trusted international infrastructure behind them, nobles would occasionally use them as a kind of bank or power of attorney. If a noble wished to join the Crusades, this might entail an absence of years from their home. So some nobles would place all of their wealth and businesses under the control of Templars, to safeguard it for them until their return. The Order's financial power became substantial, and the majority of the Order's infrastructure was devoted not to combat, but to economic pursuits.

By 1150, the Order's original mission of guarding pilgrims had changed into a mission of guarding their valuables through an innovative way of issuing letters of credit, an early precursor of modern banking. Pilgrims would visit a Templar house in their home country, depositing their deeds and valuables. The Templars would then give them a letter which would describe their holdings. Modern scholars have stated that the letters were encrypted with a cipher alphabet based on a Maltese Cross; however there is some disagreement on this, and it is possible that the code system was introduced later, and not something used by the medieval Templars themselves. While traveling, the pilgrims could present the letter to other Templars along the way, to "withdraw" funds from their accounts. This kept the pilgrims safe since they were not carrying valuables, and further increased the power of the Templars.

The Knights' involvement in banking grew over time into a new basis for money, as Templars became increasingly involved in banking activities. One indication of their powerful political connections is that the Templars' involvement in usury did not lead to more controversy within the Order and the church at large. Officially the idea of lending money in return for interest was forbidden by the church, but the Order sidestepped this with clever loopholes, such as a stipulation that the Templars retained the rights to the production of mortgaged property. Or as one Templar researcher put it, "Since they weren't allowed to charge interest, they charged rent instead."

Based on this mix of donations and business dealing, the Templars established financial networks across the whole of Christendom. They acquired large tracts of land, both in Europe and the Middle East; they bought and managed farms and vineyards; they built massive stone cathedrals and castles; they were involved in manufacturing, import and export; they had their own fleet of ships; and at one point they even owned the entire island of Cyprus.

In 1152, Tortosa was handed to the Knights Templar, who used it as a military headquarters. They engaged in some major building projects, constructing a castle around 1165 with a large chapel and an elaborate keep, surrounded by thick double concentric walls. The Templars' mission was to protect the city and surrounding lands, some of which had been occupied by Christian settlers, from Muslim attack. Nur ad-Din Zangi captured Tartus from the Crusaders for a brief time before he lost it again.

The Battle of Montgisard was fought between the Kingdom of Jerusalem (aided by some 80 Knights Templars) and the Ayyubids on 25 November 1177 at Montgisard, in the Levant between Ramla and Yibna. The 16-year-old Baldwin IV of Jerusalem, seriously afflicted by leprosy, led an outnumbered Christian force against Saladin's troops in what became one of the most notable engagements of the Crusades. The Muslim army was quickly routed and pursued for twelve miles. Saladin fled back to Cairo, reaching the city on 8 December, with only a tenth of his army.

The city of Tortosa was recaptured by Saladin in 1188, and the main Templar headquarters relocated to Cyprus. However, in Tortosa, some Templars were able to retreat into the keep, which they continued to use as a base for the next 100 years. They steadily added to its fortifications until it also fell, in 1291. Tortosa was the last outpost of the Templars on the Syrian mainland, after which they retreated to a garrison on the nearby island of Arwad, which they held for another decade.

The siege of Acre was the first significant counterattack by Guy of Jerusalem against Saladin, leader of the Muslims in Syria and Egypt. This pivotal siege formed part of what later became known as the Third Crusade. The Templars move their headquarters to Acre after the Latin Crusaders successful siege of the city.

The Fall of Acre took place in 1291 and resulted in the Crusaders losing control of Acre to the Mamluks. It is considered one of the most important battles of the period. Although the crusading movement continued for several more centuries, the capture of the city marked the end of further crusades to the Levant. When Acre fell, the Crusaders lost their last major stronghold of the Crusader Kingdom of Jerusalem.

The Templar headquarters moved to Limassol on the island of Cyprus when their last mainland strongholds, Tortosa (Tartus in Syria) and Atlit (in present-day Israel) also fell.

The Knights Templar set up a permanent garrison on the island of Ruad in 1300, but the Mamluks besieged and captured Ruad in 1302. With the loss of the island, the Crusaders lost their last foothold in the Holy Land.

In 1305, the new Pope Clement V, based in Avignon, France, sent letters to both the Templar Grand Master Jacques de Molay and the Hospitaller Grand Master Fulk de Villaret to discuss the possibility of merging the two orders. Neither was amenable to the idea, but Pope Clement persisted, and in 1306 he invited both Grand Masters to France to discuss the matter.

De Molay arrived first in early 1307, but de Villaret was delayed for several months. While waiting, De Molay and Clement discussed criminal charges that had been made two years earlier by an ousted Templar and were being discussed by King Philip IV of France and his ministers. It was generally agreed that the charges were false, but Clement sent the king a written request for assistance in the investigation. According to some historians, King Philip, who was already deeply in debt to the Templars from his war against England, decided to seize upon the rumours for his own purposes. He began pressuring the church to take action against the order, as a way of freeing himself from his debts.

At dawn on Friday, 13 October 1307—a date sometimes incorrectly cited as the origin of the popular stories about Friday the 13th — King Philip IV ordered de Molay and scores of other French Templars to be simultaneously arrested. The arrest warrant started with the words: Dieu n'est pas content, nous avons des ennemis de la foi dans le Royaume" ("God is not pleased. We have enemies of the faith in the kingdom"). Claims were made that during Templar admissions ceremonies, recruits were forced to spit on the Cross, deny Christ, and engage in indecent kissing; brethren were also accused of worshipping idols, and the order was said to have encouraged homosexual practices. Many of these allegations contain tropes that bear similarities to accusations made against other persecuted groups such as Jews, heretics, and accused witches. These allegations, though, were highly politicised without any real evidence. Still, the Templars were charged with numerous other offences such as financial corruption, fraud, and secrecy. Many of the accused confessed to these charges under torture (even though the Templars denied being tortured in their written confessions), and their confessions, even though obtained under duress, caused a scandal in Paris. The prisoners were coerced to confess that they had spat on the Cross. One said: "Moi, Raymond de La Fère, 21 ans, reconnais que j'ai craché trois fois sur la Croix, mais de bouche et pas de cœur" ("I, Raymond de La Fère, 21 years old, admit that I have spat three times on the Cross, but only from my mouth and not from my heart"). The Templars were accused of idolatry and were suspected of worshiping either a figure known as Baphomet or a mummified severed head they recovered, amongst other artifacts, at their original headquarters on the Temple Mount that many scholars theorize might have been that of John the Baptist, among other things.

In 1312, after the Council of Vienne, and under extreme pressure from King Philip IV, Pope Clement V issued an edict officially dissolving the Order. Many kings and nobles who had been supporting the Knights up until that time, finally acquiesced and dissolved the orders in their fiefs in accordance with the Papal command. Most were not so brutal as the French. In England, many Knights were arrested and tried, but not found guilty.

The elderly Grand Master Jacques de Molay, who had confessed under torture, retracted his confession. Geoffroi de Charney, Preceptor of Normandy, also retracted his confession and insisted on his innocence. Both men were declared guilty of being relapsed heretics, and they were sentenced to burn alive at the stake in Paris on 18 March 1314. De Molay reportedly remained defiant to the end, asking to be tied in such a way that he could face the Notre Dame Cathedral and hold his hands together in prayer. According to legend, he called out from the flames that both Pope Clement and King Philip would soon meet him before God. His actual words were recorded on the parchment as follows: "Dieu sait qui a tort et a péché. Il va bientot arriver malheur à ceux qui nous ont condamnés à mort" ("God knows who is wrong and has sinned. Soon a calamity will occur to those who have condemned us to death"). Pope Clement died only a month later, and King Philip died while hunting before the end of the year.

The remaining Templars around Europe were either arrested and tried under the Papal investigation (with virtually none convicted), absorbed into other Catholic military orders, or pensioned off and allowed to live out their days peacefully.

By papal decree, the property of the Templars outside France was transferred to the Knights Hospitaller, except in the Kingdoms of Castile, Aragon, and Portugal. The order continued to exist in Portugal, the first country in Europe where they had settled, occurring only two or three years after the order's foundation in Jerusalem and even having presence during Portugal's conception.

The Portuguese king, Denis I, refused to pursue and persecute the former knights, as had occurred in all other sovereign states under the influence of the Catholic Church. Under his protection, Templar organizations simply changed their name, from "Knights Templar" to the reconstituted Order of Christ and also a parallel Supreme Order of Christ of the Holy See; both are considered successors to the Knights Templar. Many surviving Templars were accepted into the Hospitallers.