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 Syrovatskys 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.
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