Can we do without 'itu' in the end at all?
In this sentence, you can.
Can "itu" also come between "peristiwa" and "yang"? "...THAT event that happend two years ago."?
Mereka mengenang peristiwa itu, yang terjadi dua tahun lalu = They recall the/that event, which happened two years ago
It depends on whether the information "happened two years ago" is a qualifier for the event, or just additional information.