The party was founded by Desmond O'Malley, a former senior minister in Fianna Fáil governments under Jack Lynch and Charles J. Haughey. O'Malley was strong opponent of Haughey, who became party leader in 1979. He was involved in a number of leadership heaves against the controversial and unpopular Haughey, and was finally expelled for conduct unbecoming a member of Fianna Fáil when he refused to support the party in a vote in Dáil Éireann. Fianna Fáil was opposing a Bill to liberalise the availability of contraception, which had been introduced by the Fine Gael/Labour Party government of Dr. Garret FitzGerald.
O'Malley, joined with resigning Fianna Fáil TDs (MPs) Mary Harney, Bobby Molloy and Pearse Wyse, Fine Gael TD Michael Keating and former Fine Gael activist Michael McDowell, to set up the new party. Though most of its membership was drawn from Fianna Fáil defectors, it was Fine Gael that it undermined the most in the 1987 general election.
The party has served in Irish coalition governments four times, all with Fianna Fáil. It served in Haughey's last administration (1989-92), in Albert Reynolds's first administration (1992), and in Bertie Ahern's two governments to date, (1997-2002; 2002 - present).
After the collapse of Reynolds' first administration, O'Malley retired from the leadership of the party. Mary Harney became the new leader, the first woman to lead any of the major Irish political parties. Harney currently serves as Tánaiste (deputy prime minister).