In 1958 the Cold War was in full force, pitting the two geopolitical giants the United States and the Soviet Union against each other for military and geopolitical influence and dominance. The NATO and Warsaw pact alliances divided Europe into two competing visions of the world, with the Western world viewing countries in the Eastern bloc as behind an Iron Curtain with the failed Hungarian Revolution in 1956 confirming this. The nuclear arms race was underway with the U.S. well ahead initially, but by 1955 the Soviets had exploded a hydrogen bomb and were beginning to catch up, sparking fears of nuclear armageddon. The Soviet launching of Sputnik into orbit in 1957 gave the Soviets a huge technological and propaganda victory and sparked a crisis of confidence in the United States and worries about falling behind technologically and militarily and concerned whether its education system was up to the job of competing with the Soviets. In Asia, the French had left Indochina in 1954 after their defeat at the Battle of Dien Bien Phu and this marked the beginning of U.S. involvement in Vietnam. The U.S. and the Soviets struggled for preeminence in the Third World through proxies in Latin America, Africa, and Asia. In the Middle East, the U.S. feared the spread of Communism starting in Egypt and attempted to secure the region's most populous and politically powerful country for the West by guarantees of funding for construction of the Aswan Dam but it was eventually the Soviets who prevailed. Soviet diplomatic and political successes in the Third World left the West worried about losing one country after another to Communism according to the domino theory evoked by President Dwight D. Eisenhower.
It was in this atmosphere of fear, mistrust, and uncertainty in the United States about Soviet military and technological might, and Communist Cold War political success in unaligned nations of the Third World that the novel was published in 1958, with immediate seismic impact.
The novel takes place in a fictional nation called Sarkhan (an imaginary country in Southeast Asia that somewhat resembles Burma or Thailand, but which is meant to allude to Vietnam) and includes several real people, most of whose names have been changed. The book describes the United States's losing struggle against Communism due to the ineptness and bungling of the U.S. diplomatic corps stemming from innate arrogance and their failure to understand the local culture.
The book is written as a series of interrelated vignettes. In one, a Burmese journalist says "For some reason, the [American] people I meet in my country are not the same as the ones I knew in the United States. A mysterious change seems to come over Americans when they go to a foreign land. They isolate themselves socially. They live pretentiously. They are loud and ostentatious."
The American Ambassador “Lucky” Lou Sears confines himself to his comfortable diplomatic compound in the capital. The Soviet ambassador speaks the local language and understands the local culture. He informs his Moscow superiors that Sears “keeps his people tied up with meetings, social events, and greeting and briefing the scores of senators, congressmen, generals, admirals, under secretaries of state and defense, and so on, who come pouring through here to ‘look for themselves.’” Sears undermines creative efforts to head off communist insurgency. The "Ugly American" of the book title refers to the plain-looking engineer Atkins, who lives with the local people, who comes to understand their needs, and who offers genuinely useful assistance with small-scale projects, such as the development of a simple bicycle-powered water pump. The book implies that the Communists were successful because they practiced tactics similar to those of Atkins. 
Characters in real life
According to an article published in Newsweek in May, 1959, the "real" "Ugly American" was identified as an International Cooperation Agency technician named Otto Hunerwadel, who, with his wife Helen, served in Burma from 1949 until his death in 1952. They lived in the villages, where they taught farming techniques, and helped to start home canning industries.
Another of the book's heroes, Colonel Hillandale, appears to have been modeled on the real-life U.S. Air Force Lieutenant General Edward Lansdale, who was an expert in counter-guerrilla operations.
The book was serialized in the Saturday Evening Post in the Fall of 1958, and came out as a Book of the Month Club selection in October.
The book became an instant bestseller, going through twenty printings from July to November 1958, remaining on the bestseller list for a year and a half, and ultimately selling four million copies.
After the book had gained wide readership, the term "Ugly American" came to be used to refer to the "loud and ostentatious" type of visitor in another country, rather than the "plain looking folks, who are not afraid to 'get their hands dirty' like Homer Atkins" to whom the book itself referred.
The title entered the English language for a type of character portrayed in the book. The book is one of the leading best-sellers in the nation's history, and one of a very few works of fiction that had a profound effect on American political debate and have had a lasting impact ; as such, it is in the same league as Uncle Tom's Cabin and The Jungle.
Lasting impacts in the Kennedy administration included Kennedy's national physical fitness program, his statement of America's willingness to "bear any burden" in the Third World, the founding of the Peace Corps aimed primarily at development in the Third World, the build-up of American Special Forces, and emphasis on counterinsurgency tactics in fighting communists in South Vietnam. According to British documentary film maker Adam Curtis, Senator and future U.S. President "John F. Kennedy was gripped by The Ugly American. In 1960, he and five other opinion leaders bought a large advertisement in the New York Times, saying that they had sent copies of the novel to every U.S. Senator, because its message was so important."
Within a few years of publication of the book, President Lyndon Baines Johnson had made reference to the term in his Great Society speech to a 1964 university graduating class, the term Ugly American and it was solidifying as a pejorative expression referring more generally to the offensive behavior of Americans abroad.