The attack started when Dal Laen Enkoa, then in command of the CDS Lakar, discovered "evidence" (which was intentionally leaked to him by Elim Garak, an Obsidian Order operative) that convinced him weapons were being stored at the Federation colony. Enkoa then decided to attack the colony without permission from his superiors, and launched an assault on the colony, only stopping when he was called off by Jagul Hanno. These actions forced the Cardassians to launch a ground invasion of the planet and to annex the entire system. (ST novella: The Slow Knife)
After the attack the USS Rutledge, under the command of Captain Benjamin Maxwell, was diverted from its normal course to attempt a rescue mission of the colonists. The mission was a personal one for Maxwell as his wife and children lived in an outlying district there. (Last Unicorn RPG module: All Our Yesterdays: The Time Travel Sourcebook)
Upon the arrival of the Rutledge, all communications with the colony were out and sensors showed survivors fleeing to the outlying district with heavy casualties in the main settlement. With communications down, a plan to transport survivors to the ship while in orbit had to be abandoned. Captain Maxwell personally chose a squadron of men to accompany him on the away team over his first officer's obligatory, but halfhearted, objections.
The Rutledge away team consisted of Maxwell, Miles O'Brien, Will Kayden, Volodzhe, Meier, Tsao, Rendell, Lind, and Garcia. Maxwell took O'Brien and Kayden with him while the others split into teams with orders to find survivors and have them beamed to the ship. With Cardassian forces less than a kilometer away, it wasn't long before combat ensued.
Kayden was killed while attempting to rescue some surviving colonists. Although O'Brien avenged his friend's death, the horror of taking a life would haunt him throughout his career. The massacre also took a heavy toll on Captain Maxwell, whose family had been killed shortly before his arrival.
The remaining Cardassian forces eventually retreated from the planet, but the crew of the Rutledge would long remember the aftermath. The subject of the incident, according to O'Brien, was never brought up again among the crew. It wouldn't be until Maxwell, as captain of the USS Phoenix, destroyed Cardassian vessels without provocation that the wound of Setlik III would be reopened. (TNG episode: "The Wounded", DS9 novelization: Emissary)