The Destruction of Knothole was a massive military engagement between the Eggman Empire and the Kingdom of Knothole lasting mere hours. The engagement marked a massive military defeat for the Kingdom of Knothole and a quick, decisive victory for the Eggman Empire. The victory was short lived however, when the few un-captured citizens staged a rescue mission and had all of the citizens transported to New Mobotropolis.
During the time Sonic the Hedgehog spent in space-having been transported off of Mobius while battling the Xorda-Dr. Eggman officially formed the Eggman Empire and declared war against the Kingdom of Knothole and the United Federation. For nearly two years, the Eggman Empire spent most of its time and resources on the occupation of Angel Island, where the Echidna population was predominantly enslaved and sent to concentration camps by the occupying Dingo Regime. Eggman changed his focus back Knothole upon Sonic's return, realizing that the Kingdom of Knothole now had their greatest warrior back and posed a legitimate threat. (StH: #125, #130)
For the next few months, the Eggman Empire launched a series of failed campaigns against the Kingdom of Knothole, though this was primarily due to Dr. Eggman wishing to enjoy the various "war games" and prolong the war until he felt it was time to truly act. In 3237, the Egg Fleet had been completed and was ready for use. Eggman first deployed his air force to win a decisive victory during the "Darkest Storm" when Ixis Naugus and his followers joined with Mammoth Mogul's faction. Though Eggman could have used the Egg Fleet to capture Sonic and his allies then, he decided to bide his time. (StH: #132, #133, #162, #163, #164, #175)
After the successful defeat of A.D.A.M. - largely due to the Egg Fleet - Dr. Eggman was prepared to launch a full-blown offensive against his enemies. The Kingdom of Knothole, slowly taking the Eggman Empire less seriously after obtaining numerous victories upon Sonic's return to Mobius, was completely unprepared for the invasion. Although Espio the Chameleon infiltrated New Megaopolis and discovered Eggman's plans, he was subsequently captured and prevented from bringing the news back to Knothole. Not wishing to delay the invasion any longer, Eggman gave the order to attack. (StH: #169, #174)
While the Knothole Freedom Fighters and Chaotix spent their time relaxing at Freedom HQ, the Egg Fleet began its aerial bombardment of the Knothole Kingdom. Snively arrived at Freedom HQ and attacked both teams, acting as a diversion while the Egg Fleet attacked and captured the kingdom's citizens. After capturing all but Sonic, Knuckles, Tails, Amy Rose and NICOLE, Snively's attack mech was defeated and Snively retreated. Sonic, the only one of the un-captured citizens who was not buried under the rubble of the former Freedom HQ, ran to Castle Acorn to warn the king of the attack. As he ran through Knothole he witnessed the large-scale destruction. Just as he arrived at the castle, the large structure exploded. Emerging from the flames was Dr. Eggman in his Egg Beater battle suit. Sonic fought bravely against Eggman, but was ultimately no match for the Egg Beater suit and was left beaten and demoralised. Eggman, wanting Sonic to remember the tragic defeat, left Sonic alive and alone while the Egg Fleet returned to New Megaopolis. (StH: #175)
Due to Snively failing to capture Knuckles, Tails, Amy and NICOLE, the four regrouped and managed to launch a successful rescue mission in New Megaopolis, preventing the captured citizens from death while being held in Egg Grape Chambers. Due to Eggman's overconfidence and refusal to listen to Snively, NICOLE managed to re-calibrate the transported beams on the Egg Fleet and Egg Beater to transport the targets to the nanite city which NICOLE had remade into New Mobotropolis. There were no casualties, but some were injured, including Rotor's injured back and neck, and Charmy Bee's slight memory loss due to the Egg Grape Chambers. Because the city was protected by an energy force field, Eggman was unable to destroy it or re-capture the Mobians within. With assistance from the Knothole Freedom Fighters and the Chaotix, Sonic managed to defeat the Egg Beater and force Eggman to withdraw - a complete turnaround for the Eggman Empire and partial victory for the Kingdom of Knothole, which would later result in Eggman's loss of sanity. (StH: #176, #177, #200)
However, witnessing Knothole's destruction inspired Amadeus and Rosemary Prower to start a revolution within the city to remove the Acorns from power and institute a democracy, which caused the formation of the Council of Acorn and Republic of Acorn. (StH: #178, #179)