The Sundering

Whether this is historical fact or creation myth is a question that is at the heart of much debate both amongst the Gnomes  and the Halflings, but it is an event that has seen celebration and remembrance for millennia and is as ingrained in the sense of self of these two races as are their physical traits and the rites of passage into adulthood.

Back when the world was still young, the westernmost part of the continent of Andúnë was inhabited by a race of diminutive stature but great magical and intellectual talent. 
They created a vast homeland for themselves, that spanned a large portion of the continent. As is bound to happen when a nation flourishes and becomes complacent in its comfort and success, different views and schools of thought emerged and grew in distance between them as their differences grew more extreme and fundamental. Over centuries, these different ways of lives clashed so badly that the westerners split in two great nations that sought to overthrow one another, igniting a war that would become so entrenched and long lasting as to bring both new nations to the brink of extintion.

Several of the Gods, it is said, were observing the events from afar, until Vaces herself decided to step in and take action. In the years that followed her intervention, the two nations tried to bridge the gaps that divided them, but found themselves unable to. Finally, the Goddess, with the accordance of many other divinities, performed a great change and altered the two nations into two distinct races with distinct physical and character traits. 
This event is known as the Sundering.

Recognising that their differences were now not only a matter of opinion but a natural fact that made all conflict irrelevant, the two new races, that of the Halflings and that of the Gnomes, went their separate ways and evolved new traditions and ways of life independent from one another.

Neither race managed to rebuild as strong and flourishing a nation as they once had built together, and this is, in a way, both the blessing and the punishment the gods meted out to them.
In time, the two races found new common ground and as they were confronted with the existence of races much more physically imposing than themselves, found new reasons to ally and help one another. The conflict of all those eons ago remains central to their identity, as both races celebrate the Sundering on midsummer eve, as the birth day of their entire race, but the animosity that once separated them has long been forgotten.
Vaces remains a central figure in the theology of both races, but since then, Gnomes and Halflings have encountered and followed different gods as well.