Egypt after 1169 was ruled by the powerful Seljuk Turks, whose great champion Saladin made it the object of his life to drive the Christian power from Palestine. Control of both Egypt and Syria allowed Saladin to surround the Crusader kingdom; on July 4, 1189, Saladin won the Battle of Hattin, and on October 2 Jerusalem surrendered. Christian power was restricted to Antioch, Tripoli, Tyre, and Margat.
Pope Gregory VIII wished to enlist the help of the kings of England and France to take back what had been lost; in response, Henry II of England and Philip II of France ended their war with each other, and both imposed a "Saladin Tithe" on their subjects to pay for a new Crusade. However, England and France soon renewed their war, and Henry II's son Richard began a rebellion against Henry as well.
Frederick I Barbarossa also responded to the Pope's call, and was the first to depart in 1189. Frederick faced opposition from the Byzantine Emperor Isaac II Angelus, who had made a secret treaty with Saladin. Frederick passed through Byzantine land as quickly as possible, and captured the Seljuk capital of Iconium on May 18, 1189. Unfortunately for his crusade, the emperor drowned in the Saleph River on June 10, 1190. Although he had a larger army than Saladin, without his leadership his troops immediately began to break up, and those who remained were quickly defeated in battle when they reached Syria.
Richard and Philip travelled by sea, though separately, to the Holy Land in 1191. On the way, Richard stopped at Cyprus, where he took offense at his treatment by the independent Byzantine ruler of the island. By the end of May, he had conquered the whole island, and later sold it to Guy of Lusignan, the nominal King of Jerusalem.
Meanwhile, Philip had arrived at Tyre and allied himself with Conrad of Montferrat, who also claimed the kingship of Jerusalem. The two besieged Acre in April, 1191, with help from the remnants of Frederick's army, and Richard arrived to take charge of the siege in June. Saladin's army attempted to break the siege, but were turned away, and the city was taken on July 12. The three Christian commanders fought for power amongs themselves; Leopold of Austria, the German commander, wanted to be recognized equally with Richard and Philip, but Richard removed Leopold's banner from the city. Philip, also frustrated with Richard, left the Holy Land in August.
Richard then decided to take the port of Jaffa, which he would need to launch an attack on Jerusalem; while on the march, Saladin attacked him at Arsuf in September, but Richard won a resounding victory.
By January of 1192, Richard was ready to march on Jerusalem, but Saladin had reinforced his army and fortified the city. Richard came within sight of Jerusalem twice, but each time retreated in the face of Saladin's larger army. Saladin then attempted to retake Jaffa in July, but was defeated by Richard's now much smaller force on July 31.
On September 2, 1192, Richard and Saladin finalized a treaty by which Jerusalem would remain under Muslim control, but which also allowed unarmed Christian pilgrims to visit the city. Richard left for England at the end of September, ending the Crusade.
The Germans who remained in the Holy Land after the Crusade formed the basis of the Teutonic Knights. The failure of the Third Crusade would also lead to the call for the Fourth Crusade six years later.