In late October 1971, with not much more than bare-bones melody and half-formed lyrics, Lennon recorded an acoustic guitar demo of "Happy Xmas (War Is Over)" in his rooms at the St. Regis Hotel in New York City, where he and Ono were living. Ono would receive co-writing credit, but the actual extent of her contribution at this initial stage is unclear since she did not participate in the demo, which was atypical of their collaborations. Another demo of the song was made in late October after the couple had taken an apartment in Greenwich Village. Lennon brought in Phil Spector to help produce, as he had with his previous two albums, John Lennon/Plastic Ono Band and Imagine, which had been released in the US several weeks earlier.

The first recording session was held on the evening of Thursday, 28 October, at the Record Plant studio. After the session musicians – some of whom had performed at one time or another as members of the Plastic Ono Band – laid down the basic instrumental backing and overdub tracks, Lennon and Ono added the main vocals. One of the four guitarists present filled in for bassist Klaus Voormann, whose flight from Germany had been delayed. The following day, Ono and the session musicians, including Voormann, recorded the single's B-side, "Listen, the Snow Is Falling". The Harlem Community Choir – 30 children, most of them four to twelve years of age – came to the studio on the afternoon of 31 October to record backing vocals for the counter-melody and sing-along chorus. Photographs for the original sleeve cover were also taken during that session by Iain Macmillan.

The song begins with spoken Christmas greetings from Ono and Lennon to their children from previous marriages: Ono whispers, "Happy Christmas, Kyoko", then Lennon whispers, "Happy Christmas, Julian"."

When Lennon first played his demo for Phil Spector, the producer remarked that the song's opening line, "So this is Christmas…", was rhythmically identical to the 1961 single "I Love How You Love Me" by The Paris Sisters, which Spector himself had produced. At the recording studio, Lennon instructed the guitarists to incorporate mandolin-style riffs similar to the ones heard in "Try Some, Buy Some", a single that Spector and George Harrison had produced in February 1971 for his wife, Ronnie Spector, formerly of the Ronettes. Spector also included percussion instruments of the sort he used on the 1963 album A Christmas Gift for You.

In addition to these reappropriated elements, the chords and melodic structure of "Happy Xmas (War Is Over)" are similar to the traditional English ballad "Skewball", but with a different rhythmic meter, subsequent modulations and a wholly new and different chorus countermelody. The verses of the song are closest in structure to the 1963 rendition (titled "Stewball") by Peter, Paul and Mary.

Apple Records released "Happy Xmas (War Is Over)" and "Listen, the Snow Is Falling" in America on 1 December 1971 (Apple 1842). Issued in 7" single format on transparent green vinyl with a card-stock picture sleeve, the pressing bore two label variations, one of which displayed a sequence of five images that showed Lennon's face transforming into Ono's. This sequence was originally featured on the reverse cover of the exhibition catalogue for Ono's career retrospective This Is Not Here, presented in October 1971 at the Everson Museum of Art in Syracuse, New York.

A dispute between music publisher Northern Songs and Lennon over publishing rights delayed the release of "Happy Xmas (War Is Over)" in the UK until 24 November 1972 (Apple R 5870). The initial British run was issued in 7" single format on opaque green vinyl with the picture sleeve and variant label, but it sold out quickly and had to be repressed on standard black vinyl.

The song's first album appearance was on Shaved Fish, the only compilation of Lennon's solo recordings released during his lifetime. "Happy Xmas" was coupled there with part of a live version of "Give Peace a Chance", performed as the finale of Lennon and Ono's One to One benefit concert on 30 August 1972. Designed by Roy Kohara, the album cover is composed of illustrations by Michael Bryan representing each song on the album; for "Happy Xmas (War Is Over)", the image shows an aeroplane dropping a Christmas ornament instead of a bomb.

Over the years, "Happy Xmas (War Is Over)" has been reissued in a number of single formats by Capitol, Geffen and Parlophone, sometimes in conjunction with the release of albums collecting Lennon's work. It has also appeared on compilations of Christmas songs, notably those from the Now That's What I Call Music! series.

A rough mix produced during the first recording session on 28 October 1971 was released in 1998 on the John Lennon Anthology.
A music video for "Happy Xmas (War Is Over)" appeared on The John Lennon Video Collection, released on VHS in 1992, corresponding to the 1989 reissue of The John Lennon Collection. It consisted of images from Lennon and Ono's 1969 "War is Over!" billboard campaign and candid photographs of the couple and their son Sean from the late 1970s, interspersed with a boys' choral ensemble singing along with the original Harlem Community Choir vocals.

In 2003, a new video was created for the remastered 5.1 version of the song for the DVD Lennon Legend: The Very Best of John Lennon. This version has over 22 million views on YouTube.