Santorini is essentially what remains of an enormous volcanic explosion, destroying the earliest settlements on what was formerly a single island, and leading to the creation of the current geological caldera.

A giant central lagoon, more or less rectangular, and measuring about 12 by 7 km (7.5 by 4.3 mi), is surrounded by 300 m (980 ft) high steep cliffs on three sides. The island slopes downward from the cliffs to the surrounding Aegean Sea. On the fourth side, the lagoon is separated from the sea by another much smaller island called Therasia; the lagoon merges with the sea in two places, in the northwest and southwest. The water in the centre of the lagoon is nearly 400 m (1,300 ft) deep, thus making it a safe harbour for all kinds of shipping. The island's harbours all lie in the lagoon and there are no ports on the outer perimeter of the island; the capital, Fira, clings to the top of the cliff looking down on the lagoon. The volcanic rocks present from the prior eruptions feature olivine and have a notably small presence of hornblende.

It is the most active volcanic centre in the South Aegean Volcanic Arc, though what remains today is chiefly a water-filled caldera. The volcanic arc is approximately 500 km long and 20–40 km wide. The region first became volcanically active around 3–4 million years ago though volcanism on Thera began around 2 million years ago with the extrusion of dacitic lavas from vents around the region of Akrotiri.

The island is the site of one of the largest volcanic eruptions in recorded history: the Minoan eruption (sometimes called the Thera eruption), which occurred some 3,600 years ago at the height of the Minoan civilization. The eruption left a large caldera surrounded by volcanic ash deposits hundreds of feet deep and may have led indirectly to the collapse of the Minoan civilization on the island of Crete, 110 km (68 mi) to the south, through the creation of a gigantic tsunami. Another popular theory holds that the Thera eruption is the source of the legend of Atlantis.

The name Santorini was given to it by the Latin Empire in the thirteenth century, and is a reference to Saint Irene. Before then it was known as Kallístē (Καλλίστη, "the most beautiful one"), Strongýlē[citation needed] (Στρογγύλη, "the circular one"), or Thēra. The name Thera was revived in the nineteenth century as the official name of the island and its main city, but the colloquial name Santorini is still in use.

The Cyclades are part of a metamorphic complex area known as the Cycladic Massif, which formed in Triassic to Tertiary time and were folded and metamorphosed during the Alpine Orogeny around 60 million years ago. Thera itself is built upon a small, non-volcanic basement that represents the former non-volcanic island which was approximately 9 by 6 km in size. The basement rock consists primarily of metamorphosed limestone and schist dating from the Alpine Orogeny. These non-volcanic rocks are exposed at the Profitis Ilias Mountains, Mesa Vouno, the Gavrillos ridge, Pyrgos, Monolithos, and the inner side of the caldera wall between Cape Plaka and Athinios.

The metamorphic grade consists of a blueschist facies resulting from tectonic deformation by the subduction of the African Plate beneath the Eurasian Plate between the Oligocene and the Miocene and represents the southernmost extent of the Cycladic blueschist belt.

The island is the remnant of a volcanic cone whose top was blown off. The inner coast around the caldera is a sheer precipice of more than 300 m drop at its highest, and exhibits the various layers of solidified lava on top of each other, and the main towns perched on the crest. The ground then slopes outwards and downwards towards the outer perimeter, and the outer beaches are smooth and shallow. Beach sand color depends on which geologic layer is exposed; there are beaches with sand or pebbles made of solidified lava of various colors: the Red Beach, the Black Beach, the White Beach, etc. The water at the darker colored beaches is significantly warmer because the lava acts as a heat absorber.

Santorini and Anafi are the only locations in Europe to feature a hot desert climate according to the Köppen climate classification system.

Excavations starting in 1967 at the site called Akrotiri under the late Professor Spyridon Marinatos have made Thera the best-known "Minoan" site outside of Crete, the homeland of the culture. The island was not known as Thera at this time. Only the southern tip of a large town has been uncovered, yet it has revealed complexes of multi-level buildings, streets, and squares with remains of walls standing as high as eight meters, all entombed in the solidified ash of the famous eruption of Thera. The site was not a palace-complex such as are found in Crete, but its excellent masonry and fine wall-paintings show that this was certainly no conglomeration of merchants' warehousing either. A loom-workshop suggests organized textile weaving for export. This Bronze Age civilization throve between 3000 to 2000 BC, and reached its peak in the period 2000 to 1580 BC.