The Games were largely overshadowed by what has come to be known as the "Munich massacre". On September 5, a group of eight members of the Black September Palestinian terrorist organization broke into the Olympic Village and took nine Israeli athletes, coaches and officials hostage in their apartments. Two of the hostages who resisted were killed in the first moments of the break-in; the subsequent standoff in the Olympic Village lasted for almost 18 hours.

Late in the evening of September 5, the terrorists and their hostages were transferred by helicopter to the military airport of Fürstenfeldbruck, ostensibly to board a plane bound for an undetermined Arab country. The German authorities planned to ambush them there, but underestimated the numbers of their opposition and were thus undermanned. During a botched rescue attempt, all of the Israeli hostages were killed. Four of them were shot, then incinerated when one of the terrorists detonated a grenade inside the helicopter in which the hostages were sitting. The five remaining hostages were then machine-gunned to death.

All but three of the terrorists were killed as well. Although arrested and imprisoned pending trial, they were released by the West German government on October 29, 1972, in exchange for a hijacked Lufthansa jet. Two of those three were supposedly hunted down and assassinated later by the Mossad. Jamal Al-Gashey, who is believed to be the sole survivor, is still living today in hiding in an unspecified African country with his wife and two children. The Olympic events were suspended several hours after the initial attack, but once the incident was concluded, Avery Brundage, the International Olympic Committee president, declared that "the Games must go on". A memorial ceremony was then held in the Olympic stadium, and the competitions resumed after a stoppage of 24 hours. The attack prompted heightened security at subsequent Olympics beginning with the 1976 Winter Olympics. Security at Olympics was heightened further beginning with the 2002 Winter Olympics, as they were the first to take place since September 11, 2001.

The massacre led the German federal government to re-examine its anti-terrorism policies, which at the time were dominated by a pacifist approach adopted after World War II. This led to the creation of the elite counter-terrorist unit GSG 9, similar to the British SAS. It also led Israel to launch an aggressive campaign known as Operation Wrath of God, in which those suspected of involvement were systematically tracked down and assassinated.

The events of the Munich massacre were chronicled in the Oscar-winning documentary, One Day in September. An account of the aftermath is also dramatized in three films: the 1976 made-for-TV movie 21 Hours at Munich, the 1986 made-for-TV movie Sword of Gideon and Steven Spielberg's 2005 film Munich. In her film 1972, Artist Sarah Morris interviews Dr. Georg Sieber, a former police psychiatrist who advised the Olympics' security team, about the events and aftermath of Black September.