Origins:
During the Northern Song Dynasty (960-1127), the 15th day of the eighth lunar month was designated as the Mid autumn festival. During the Zhou Dynasty (c. 11th century – 256 BC), the night of the roundest moon of the year was an occasion for the Chinese to hold rituals to greet the cool weather and sacrifice to the Moon Goddess. By the Tang Dynasty ( AD 618 – 907) merry-making had become part of the festival, as had watching the moon rise and enjoying its full, silvery light.

In Details:
When did this festival first begin? No exact date can be found in historical documents, but scholars assume that it is related to 2 customs in China.

The first custom concerns farmers. China is an agricultural country, and farming is closely related to the seasons. In ancient times, farmers worshipped the Earth God to pray for a good harvest, when they sowed the seeds in spring. This was known as spring worship. During autumn, farmers also worshipped the Earth God to thank him for giving them a good harvest. This was known as autumn reward. Since the 15′” month of the 8th month is the time when rice paddies are harvested, some people believe that the Mid Autumn Festival came from the autumn reward ritual.

The second custom concerns worship of the moon. According to astronomy, the Mid Autumn Festival or also known as Festival moon cakes occurs at the autumn equinox. At this time, the sunlight shines vertically on the equator, equally dividing the day and night in both the southern and northern hemispheres. The moon appears in the evening with gentle winds and light clouds. This is the best time to watch the moon. People later made this day, the day to worship the moon and also having Mooncake as the symbol of the moon.

Source : http://kevdesign.com/midautumnfestival/origin.htm

Other Mid Autumn Festival activities include:

1. Creating an altar and burning incense in honor of Chang’e – the Chinese Goddess of the Moon – and other Taoist deities. Altars honoring Chang’e are set up in the open air, facing the moon. New lotion, bath salts, make-up and other “beauty aids” are placed on the altar for her to bless. (Chang’e endows those who worship her with great beauty.)

2. Carrying brightly lit lanterns, lighting lanterns on towers, or floating sky lanterns. Huge lantern shows are a part of some festival moon cakes celebrations.

3. Planting trees; collecting dandelion leaves for all of ones family members; and putting pomelo rinds on one’s head.

4. Performing or attending Fire Dragon Dances, or other performances in public parks or theatres.

5. Enjoying an elaborate family reunion dinner, usually with mooncake.

The Legend Of Chang’e – The Chinese Moon Goddess

The legend of Chang’e – the Chinese Moon Goddess – comes in many different forms. All of them (that I’ve come across so far) unfold in the context of Chang’e’s relationship with the archer Hou Yi; involve the search for an elixir of Immortality; and end with Chang’e living on the moon. Here’s one version of this legend (which appears in a number of online locations – I’m not sure who is its original “author”):

“A long, long time ago, a terrible drought plagued the earth. Ten suns burned fiercely in the sky like smoldering volcanoes. The trees and grass were scorched. The land was cracked and parched, and rivers ran dry. Many people died of hunger and thirst.

The King of Heaven sent Hou Yi down to the earth to help. When Hou Yi arrived, he took out his red bow and white arrows and shot down nine suns one after another. The weather immediately turned cooler. Heavy rains filled the rivers with fresh water and the grass and trees turned green. Life had been restored and humanity was saved.

One day, a charming young woman, Chang’e makes her way home from a stream, holding a bamboo contaiver, A young man comes forward, asking for a drink. When she sees the red bow and white arrows hanging from his belt, Chang’e tealizes that he is their savior, Hou Yi. Inviting him to drink, Chang’e plucks a beautiful flower and gives it to him as a token of respect. Hou Yi, in turn, selects a beautiful silver fox fur as his gift for her. This meeting kindles the spark of their love. And soon after that, they get married.

A mortal’s life is limited, of course. So in order to enjoy his happy life with Chang’e forever, Hou Yi decides to look for an elixir of life.He goes to the Kunlun Mountains where the Western Queen Mother lives.

Out of respect for the good deeds the has done, the Western Queen Mother rewards Hou Yi with elixir, a fine powder made from kerndls of fruit which grows on the tree of eternity. At the same time, she tells him:If you and your wife share the elixir, you will both enjoy eternal life. But if only one of you takes it,that one will ascend to Heaven and become immortal.

Hou Yi returns home and tells his wife all that has happened and they decide to drink the elixir together on the 15th day of the eighth lunar month when the moon is full and bright.

A wicked and merciless man named Feng Meng secretly hears about their plan.He wishes chang eHou Yi an early death so that he can drink the elixir himeslf and become immortal.His opportunity finally arrives. One day,when the full moon is rising, Hou Yi is on his way home from hunting. Feng Meng kills him. The murderer then runs to Hou Yi’s home and forces Chang’e to give him the elixir, Without hesitating, Chang’e picks up the elixir and drinks it all.

Overcome with grief, Chang’e rushes to her dead husband’s sied, weeping bitterly.Soon the elixir begins to have its effect and Chang’e feels herself being lifted towards Heaven.

Chang’e decides to live on the moon because it is nearest to the earth. There she lives a simple and contented life. Even though she is in Heaven, her heart remains in the world of mortals. Never does she forget the deep love she has for Hou Yi and the love she feels for the people who have shared their sadness and happiness.”

Source : http://taoism.about.com/od/holidays/a/MidAutumn_Festival.htm