The basis of this song was a series of tragic murders, known as the "Moors Murders", as several of the victims' corpses were discovered in shallow graves on Saddleworth Moor, just outside of Manchester, England. The victims were several young children, who were tortured, violated, and murdered by a pair of monsters named Myra Hindley and Ian Brady, who were arrested in 1966. Young Steven Patrick Morrissey, who was only seven years old at the time, was greatly affected by their heinous crime, as he was around the same age as the victims. His young life was pervaded by a fear and distrust of the town which he lived in, a town unable to "...hide the stolid stench of death".
These feelings effectively shattered Morrissey's childhood innocence, and 20 years later gave rise to "Suffer Little Children", one of the most evocative songs in the history of pop music. Morrissey's powerful lyrics have the ghosts of the murdered children vowing to get revenge, promising their killers "We may be dead and we may be gone/ but we will be right by your side/ until the day you die/ this is no easy ride/ we will haunt you when you laugh/ yes you could say we're a team/ you might sleep/ you might sleep/ but you will never dream/ oh, Manchester, so much to answer for..."
Naturally, the song hit too close to home for some, and raised quite a bit of controversy. Some of the victims' family members saw the song as an attempt to cash in on a tragedy, and were quite understandably upset. In his own defense, Morrissey was quoted as saying that "Veiling the Moors Murders is wrong. We must bring it to the fore. If we don't overstate things, they'll continue to happen. We don't forget the atrocities of Hitler, do we?"
A few months after the song's release on The Smiths' eponymous first album, a relative of John Kilbride (one of the victims, mentioned by name in the third verse of the song) chanced to hear the song on a pub jukebox, and was angered by what he thought was an attempt to take advantage of John's death. After speaking with Morrissey himself, the relative realised the sincerity of the song. A similar incident happened with the mother of Lesley-Anne Downey (another of the victims, also mentioned in the third verse), who was upset by the song. This situation has also been resolved, and Morrissey claims they are now good friends, calling her a "formidable figure".
In its early stages, this song was entitled "Over the Moors". The Smiths performed it live only once, in October of 1982.
sources: http://www.oz.net/~moz/lyrics/thesmith/sufferli.htm and http://www.compsoc.man.ac.uk/~moz/quotes/spirit.htm