In August 1941, Allied forces occupied Iran, with the Soviet Union stationing forces in the north, and Britain taking control of the south. In September, the powers accused Reza Shah of pro-German sympathies and forced him to abdicate in favor of his twenty-two-year-old son, Muhammad Reza Shah (r. 1941–1979). Paradoxically, despite war and foreign occupation a weaker monarchy brought a degree of democratization to the nation. Progressive nationalists, both inside and outside the Parliament, revived the legacy of the constitutional era by campaigning for political reforms. Numerous political organizations and trade unions also emerged, among them the Stalinist Tudeh (Masses) Party.

Oil had become an important part of Iran's economy by the 1920s, and by World War II it assumed a pivotal place in the nation's international trade. As the war drew to an end in late 1944, the Soviet Union, competing with the West for postwar global hegemony, demanded the right to extract oil in the northern Caspian region. The Tudeh Party backed the Soviets, arguing that the United States and the Soviet Union should be treated equally and that Soviet demands for oil concessions be honored as part of the fight against fascism. But nationalists, led by MP Dr. Muhammad Mosaddeq, maintained that neither the Westerners nor the Soviets be given such lucrative concessions in the future.