US involvement in Nicaragua during the Reagan administration became synonymous with subterfuge, illegal and covert operations, a disregard for congressional and public approval, and the infamous Iran–Contra scandal. Nicaragua was a country of significant strategic geographical importance to the US due to its central location in Latin America. It provided the Reagan administration with a chance to quash the perceived communist threat in the form of the Sandinista government. Thus, US involvement in Nicaragua was characterised by deep-rooted Cold War suppositions. Removing the Sandinistas from power became one of the foremost foreign policy objectives of the Reagan administration. US hegemony in the region was threatened by what the Americans saw as a Marxist proxy in Latin America in the guise of the Sandinistas. Nicaragua's close association with Cuba and the Eastern bloc fuelled US fears of Marxist expansionism in the region. Reagan could not, nor would not, allow the US to be further isolated in its own backyard.

Nicaragua posed a number of additional challenges for the US, namely, the Sandinista's alleged provision of arms to insurgents in neighbouring El Salvador, a country in which the US had considerable interests. Salvadoran guerrillas armed by Nicaragua and Cuba could potentially uproot the US-supported Salvadoran government. As a result, El Salvador and Nicaragua were inextricably linked for the Reagan administration. Therefore, immediate and unequivocal US action had to be taken. US involvement in Nicaragua evolved from initial financial assistance to the role of training proxy ‘freedom fighters’, or more commonly termed ‘contras’ after the Spanish word ‘ contrarevolucionarios’. The Reagan administration began to supply, train and organise the contras both at home and in Honduras, where the contras established base camps along its southern border with Nicaragua.

US involvement in Nicaragua took an ominous turn in 1985 when NSC officials, such as Colonel Oliver L. North, John Poindexter and Robert McFarlane, agreed to sell US arms to Iran in return for the release of seven American hostages held captive in Beirut. The proceeds from these arm sales were thereafter redistributed to the contra forces in Nicaragua and Honduras, in violation of US federal law. This plan allowed the US to override congressional orders to halt all US assistance to the contras and to break a pre-existing US embargo on arms sales to Iran.