In short, the UN forces were able to drive North Korean forces out of South Korea. They then began advancing into North Korea. At this point China entered the war (under the guise of the PVA) on the side of the North Koreans, which was not something which had been anticipated. This resulted in several defeats, and the UN forces being pushed back towards the prewar boundary. MacArthur wanted the option to expand the scope of the war by using nuclear weapons against North Korea and northern China, which Truman didn't want because he was afraid that doing so would mean full-scale war against China and the USSR, and possibly an invasion of Europe by the latter while the US was tied down in Asia. The Wikipedia links posted by some of the other users make for interesting reading.

It should also be noted that North Korea, while the instigator of the war and a Communist country, was in a very different position in the 1950s. It was a richer country than South Korea until the 1970s, and South Korea at the time was an American-backed military dictatorship. While there may have been a moral argument to roll back Communism as far as possible, Truman's concerns about the geopolitical implications of expanding the war were very real, and calling them cowardice is a rather crude mischaracterization.

MacArthur publicly stated dropping nuclear weapons on the northern border of the Korean peninsula to prevent the Chinese hordes from invading was necessary to secure peace in the Korean peninsula. Truman fired him because the long-term strategy the US had with the Chinese had a threshold of military conflict that MacArthur was far surpassing. Truman and the strategists involved believed the conflict with the Chinese had to remain on the Korean peninsula. They believed MacArthur's plans to drop nuclear weapons on the Chinese side of the Korean border would escalate the conflict to a point of becoming an uncontrollable conflict in the region.

Somebody more knowledgeable than me can elaborate on this, but in a nutshell he was an american general during the Korean War, who had a sort of aggressive diplomatic and military stance (he wanted to nuke North Korea in 1951, too) and was relieved by Truman.

http://en.wikipedia.org/wiki/Douglas_MacArthur

MacArthur is possibly one of the finest generals in American history. But while he's widely beloved across Asia for his work in Japan and especially the Philippines, his American legacy is tarnished after Truman publicly disgraced him for threatening China with war after Chinese troops had overrun American forces in Korea.

The Chinese intervention in Korea was overwhelming, and Americans were forced to retreat -- and considered evacuating the peninsula altogether. MacArthur, fresh from Japan and the Philippines, was determined to save Korea from its modern fate and threatened China with war if they would not withdraw from what is now North Korea.

Truman had already significantly interfered with MacArthur's prosecution of the war, and eventually relieved him entirely when he felt MacArthur was too provocative. That led to the use of North Korea as a Chinese buffer state, much as Stalin used Eastern Europe, and to the situation we have today.

It's one of the worst blunders in the history of American foreign policy. Now, not only is North Korea a paranoid dictatorship with more than enough conventional arms to reduce South Korea to rubble within hours, they're armed with nuclear weapons and increasingly hostile even to their Chinese sponsors.

Since I identify as mostly liberal, I always defaulted to a defense of Truman. But I was wrong. Truman's failure should have stained his legacy, not MacArthur's. And for exactly the same reasons I outlined, MENA states dominated by fundamentalist Islam must not be allowed to gain nuclear weapons. Rogue states and lunatics have ruined too many lives to be protected by a kneejerk fear of war.

http://en.wikipedia.org/wiki/President_Truman's_relief_of_Ge...