The story of Chanukkah begins in the reign of Alexander the Great. Alexander conquered Syria, Egypt and Palestine, but allowed the lands under his control to continue observing their own religions and retain a certain degree of autonomy. Under this relatively benevolent rule, many Jews assimilated much of Hellenistic culture, adopting the language, the customs and the dress of the Greeks, in much the same way that Jews in America today blend into the secular American society.
More than a century later, a successor of Alexander, Antiochus IV was in control of the region. He began to oppress the Jews severely, placing a Hellenistic priest in the Temple, massacring Jews, prohibiting the practice of the Jewish religion, and desecrating the Temple by requiring the sacrifice of pigs (a non-kosher animal) on the altar. Two groups opposed Antiochus: a basically nationalistic group led by Mattathias the Hasmonean and his son Judah Maccabee, and a religious traditionalist group known as the Chasidim, the forerunners of the Pharisees (no direct connection to the modern movement known as Chasidism). They joined forces in a revolt against both the assimilation of the Hellenistic Jews and oppression by the Seleucid Greek government. The revolution succeeded and the Temple was rededicated.
According to tradition as recorded in the Talmud, at the time of the rededication, there was very little oil left that had not been defiled by the Greeks. Oil was needed for the menorah (candelabrum) in the Temple, which was supposed to burn throughout the night every night. There was only enough oil to burn for one day, yet miraculously, it burned for eight days, the time needed to prepare a fresh supply of oil for the menorah. An eight day festival was declared to commemorate this miracle. Note that the holiday commemorates the miracle of the oil, not the military victory.
Our rabbis taught the rule of Chanukkah: … on the first day one [candle] is lit and thereafter they are progressively increased … [because] we increase in sanctity but do not reduce. -Shabbat 21b, Babylonian Talmud
Chanukkah is not a very important religious holiday. The holiday’s religious significance is far less than that of Rosh Hashanah, Yom Kippur, Sukkot, Passover, and Shavu’ot. It is roughly equivalent to Purim in significance, and you won’t find many non-Jews who have even heard of Purim! Chanukkah is not mentioned in Jewish scripture; the story is related in the book of Maccabees.
The only religious observance related to the holiday is the lighting of candles. The candles are arranged in a candelabrum called a menorah (or sometimes called a chanukkiah) that holds nine candles: one for each night, plus a shammus (servant) at a different height. On the first night, one candle is placed at the far right. The shammus candle is lit and three berakhot (blessings) are recited: l’hadlik neir (a general prayer over candles), she-asah nisim (a prayer thanking G-d for performing miracles for our ancestors at this time), and she-hekhianu (a general prayer thanking G-d for allowing us to reach this time of year). After reciting the blessings, the first candle is then lit using the shammus candle, and the shammus candle is placed in its holder. The candles are allowed to burn out on their own after a minimum of 1/2 hour. Each night, another candle is added from right to left (like the Hebrew language). Candles are lit from left to right (because you pay honor to the newer thing first). On the eighth night, all nine candles (the 8 Chanukkah candles and the shammus) are lit. On nights after the first, only the first two blessings are recited; the third blessing, she-hekhianu is only recited on the first night of holidays.
Why the shammus candle? The Chanukkah candles are for pleasure only; we are not allowed to use them for any productive purpose. We keep an extra one around (the shammus), so that if we need to do something useful with a candle, we don’t accidentally use the Chanukkah candles. The shammus candle is at a different height so that it is easily identified as the shammus.
It is traditional to eat fried foods on Chanukkah because of the significance of oil to the holiday. Among Ashkenazic Jews, this usually includes latkes (pronounced “lot-kuhs” or “lot-keys” depending on where your grandmother comes from. Pronounced “potato pancakes” if you are a goy.)
Gift-giving is not a traditional part of the holiday, but has been added in places where Jews have a lot of contact with Christians, as a way of dealing with our children’s jealousy of their Christian friends. It is extremely unusual for Jews to give Chanukkah gifts to anyone other than their own young children. The only traditional gift of the holiday is “gelt,” small amounts of money.
Information taken from jewfaq.org