  We develop a model of particle acceleration in explosive reconnection events
in relativistic magnetically-dominated plasmas and apply it to explain
gamma-ray flares from the Crab Nebula. The model relies on development of
current-driven instabilities on macroscopic scales (not related to plasma skin
depths). Using analytical and numerical methods (fluid and particle-in-cell
simulations), we study a number of model problems in relativistic
magnetically-dominated plasma: (i) we extend Syrovatsky's classical model of
explosive X-point collapse to magnetically-dominated plasmas; (ii) we consider
instability of two-dimensional force-free system of magnetic flux tubes; (iii)
we consider merger of two zero total poloidal current magnetic flux tubes. In
all cases regimes of spontaneous and driven evolution are investigated. We
identify two stages of particle acceleration: (i) fast explosive prompt X-point
collapse and (ii) ensuing island merger. The fastest acceleration occurs during
the initial catastrophic X-point collapse, with the reconnection electric field
of the order of the magnetic field. The explosive stage of reconnection
produces non-thermal power-law tails with slopes that depend on the average
magnetization. The X-point collapse stage is followed by magnetic island merger
that dissipates a large fraction of the initial magnetic energy in a regime of
forced reconnection, further accelerating the particles, but proceeds at a
slower reconnection rate. Crab flares result from the initial explosive stages
of magnetic island mergers of magnetic flux tubes produced in the bulk of
nebula at intermediate polar regions. The post-termination shock plasma flow in
the wind sectors with mild magnetization naturally generates large-scale highly
magnetized structures. Internal kink-like instabilities lead to the formation
of macroscopic current-carrying magnetic flux tubes that merge explosively.
