Here's the deal, the elves on Arboria are too much like the elves in Lord of the Rings and a little too "high fantasy" for a modern setting, many of the gods on the layer are going to die during the Pantheon Wars, anyway, and it would be good to shake up and pare down the rather complicated groupings of realms, regions, and races on the layer, so let's burn the forests of Arvandor to the ground, and maybe take the whole layer with them. First, let's cover the basic questions:
When did it happen?
I'd say during the Pantheon Wars, with so many gods on Arvandor (including the entire Elven and Olympian pantheons), I would think that the layer would be one of the hardest hit during the war, and when chaotic dieties square off, it's a given that there will be some collateral damage.
Why did it happen?
This one you guys will have to help me with, as I'm still not entirely certain of the various sides in the Pantheon War and don't want to mangle it too badly.
How did it happen?
It probably involved some sort of divine explosion, or something similar. For the added blow, I think it should be the work of one of the patrons of the plane. Preferibly that prick Corellon, but it also seems like the kind of thing Zeus might do.
How bad was it?
It's up to you guys whether it should decimate (or even destroy) the entire layer or simply whipe the elven realm of Arvandor off the map, but I think that, unless we want to spare Olympus, we should go all out and trash the layer properly.
What happens to the residents?
Most of the elves flee to Alfheim on Ysgard, while others are scattered across the Outer Planes. The Olympians (if Olympus is destroyed) relocate to Arborea's third layer, Ossa, and start to rebuild their realm there. Most of the various other denizens flee to Ossa, Ysgard, the Beastlands or the Outlands, while the petitioners and Eladrin stay to try to heal the layer.
What happens to the gods?
Again, I'd like it if people who knew more about the Pantheon War answered this question, but I think most of them would survive and would rebuild or relocate their realms, but if possible, I want a number of the elven dieties to perish (preferably including Corellon) so that elves will have a significant break from tradition (see next question). When the surviving elven pantheon moved to Alfheim after the Pantheon War, they were forced to strike a bargain of some sort with Frey and the other powers there. Although most people probably don't know what this bargain is, it has to be something big.
What happens to the elves?
After the deaths of many of their dieties and the incineration of their heaven, at the hands of one of their own no less (unless it isn't) elves all over the Multiverse will lose faith and begin to abandon the old ways. Many will move out of the forests and get jobs in factories and farms and gradually integrate themselves into the human-dominated societies to the point where most city elves will use guns instead of bows and wouldn't be able to recognise a rowan tree if one fell on them. Some of them will even *gasp* become Lawful. Other more reactionary elves will do what reactionary people everywhere do and blame the destruction of Arvandor on a loss of traditional elven virtues and see the city elves as further proof of this. These hyper-conservatives will become ever more isolated and gradually retreat deeper and deeper into the forest to the point where they become backwards savages that most city folk don't even realize exist.
Meanwhile, the relocation of the pantheon to Alfheim will cause the elven race as a whole to gradually become less "good" and a little bit more mercenary. This will actually help their relations with other races, as they become less prone to moralizing and tend to be more likely to treat "lesser" races as equals. Elves have a strong martial tradition, and, due to the general desperation of things immediately following Arvandor's destruction, many planar elves sold their combat skills to the various factions in the Pantheon War and the chaos afterwards. To this day, elven mercenaries remain a key fixture of many planar armies, and are particularly known for their skills as snipers.
What happens to Arvandor itself?
Although Arvandor will remain a blasted wasteland for decades (much to the dismay of Sigillian grocers), the plane will eventually rejuvinate under the patient attention of the Eladrin and the surviving petitioners, and will become a shining example of the healing powers of good. That said, it will never be the same. The changing character of the Prime will cause the regrown layer to resemble more of a national park than an untamed wilderness. The trees will be smaller, the beasts less fearsome, and the tourists will be everywhere. Visitors will come from all over the planes to see the regrown Arvandor, including upper planar sightseers who want to see the site of the "Great Cataclysm" up close, young city elves who want to see the great forests their parents and grandparents speak of, and other people who are just looking for a good place to go backpacking.
Although planar merchants and farmers are gradually attempting to reclaim Arvandor's reputation of the breadbasket of the planes, most of the layer is uncultivated, and much of it has not been properly mapped since before the cataclysm. In fact, despite the relatively safe "nature reserve" atmosphere of much of the regrown Arvandor, the older, wilder nature of the plane is beginning to reemerge in isolated pockets of woodland. Creatures that had been thought to have died out on the layer are beginning to resurface. Although this means that the layer is recovering, it is also becoming far more dangerous for careless travelers and is likely to become more dangerous still as time goes on.
Arvandor petitioners have become something akin to park rangers. In addition to helping to repair the damage done to the plane, they are also tasked with protecting the plane from people who would harm it, and protecting those visitors who simply wish to see the plane from themselves. Unfortunately, the petitioners tend to disagree on which task is most important and which methods are best, and the likewise devided Eladrin aren't helping any.
I think Olympus should be incinerated by a battle between Gods and much of the forest is destroyed instantly, with the rest being destroyed in a massive forest fire. Maybe that's a little extreme, but that's how I see it.