In the opening scenes, a high-profiler magnate named Christopher Van der Veer (Max Brown) partakes in a ground-breaking cerimony for a new building to be built in the South Bronx. That evening, Van der Veer, his cocaine-snorting wife, and bodyguard/limo driver drive through Manhattan to the Battery Park waterfront. While the three of them take strolls around the deserted park, they are stalked by a number of mysterious creatures (unseen except for point-of-view shots set a few feet off the ground and in a strange thermal-image color pattern). They are all killed one by one in rapid sucession by the unseen creatures.
The next morning, NYPD Captain Dewey Wilson (Albert Finney) is assigned to solve the bizarre, violent murders. Executive Security, Van der Veer's client, prefers to blame the murders on terrorists, but knowing that the victim's bodyguard was a 300 pound Haitian with voodoo ties makes Wilson skeptical. At the crime scene, Wilson meets with Warren, his superior. With pressure to solve the case coming down from both the commissioner and mayor, Warren partners Wilson with criminal psychologist Rebecca Neff (Diane Venora).
Meanwhile a homeless man goes exploring an abandoned church in Charlotte Street, South Bronx, which was going to be demolished by Van der Veer along with the rest of the ruined buildings in the area, in order to build new apartment complexes, and is suddenly attacked and torn to pieces by another unseen monstrous being.
Soon after that and while investigating the abandoned church, sounds of suffering lure Neff upstairs. Wilson follows her but doesn't hear the suffering, but once Neff is separated from him, he hears a wolf's howl. He goes up after Neff and drags her forcibly to safety. Soon after, a bridge worker is murdered by another unseen attacker.
NY coroner Whittington (Gregory Hines) discovers non-human hairs on several mutilation victims and consults zoologist Ferguson (Tom Noonan). Ferguson immediately identifies the hairs as belonging to Canis lupus, also explaining that there are 40 existing subspecies and these particular hairs don't belong to any of them. Ferguson foreshadows his own death when he asks incredulously "What are you two trying to pin on the big bad (wolf)?". He compares wolves to Indians, giving Wilson his first real inspiration.
Wilson finds Eddie Holt (Edward James Olmos), a militant Native activist he arrested some years ago for killing a conservative Indian or "apple" (a Native who is "red" -a true Native- on the outside but white on the inside). He claims he's a shapeshifter, which implicates him as the killer, and even goes so far as to threaten Wilson with carefully constructed dialogue. Feeling that the conversation is circumstantial and potentially dangerous, Wilson opts to let well alone and tail Eddie later that night on his own terms. While following animal clues Ferguson goes to Central Park, where the actual killer ambushes and kills him under a tunnel. Oblivious, Wilson spends the remainder of his night with Neff. In the following morning, a man in a jogging suit rides Ferguson's motorcycle right past Wilson as he leaves Rebecca's apartment. The man crashes, illustrating that he stole the motorcycle.
Back at the police station, Whittington is the second person to foreshadow his own death when he says "If violence comes, I'm ready. I'm a dead shot, and a karate expert". He and Wilson stakeout the Bronx church armed with sniper rifles and sound equipment and after he almost blows his ears out by opening a beer can near the sound mic, an animal who appears to be a wolf ambushes and kills him. Meanwhile, Executive Security apprehends a "Götterdämmerung" terrorist cell in connection with the Van der Veer slaying.
A traumatized Wilson escapes the church and finds himself at the Wigwam Bar, where Eddie Holt and his friends are drinking. The group of Natives reveal the true nature of the killer as Wolfen, the wolf spirit. They explain to Wilson that the Wolfen have extraordinary abilities and that they "might be gods". Eddie explains to Wilson that he can't fight the Wolfen, stating: "You don't have the eyes of the hunter, you have the eyes of the dead". The leader of the group, Old Indian, informs Wilson that Wolfen kills to protect its hunting ground. Wilson resolves to end his involvement in the Van der Veer case.
In an alleyway, Neff, Wilson, and Warren are cornered by the wolfen superwolf pack. Warren tries to flee but is killed when a pack member severs his hand and then decapitates him in his car. Wilson and Neff flee and blow up Warren's car with a pack member in it. When he and Neff are cornered in Van der Veer's penthouse by the Wolfen pack led by its white alpha, Wilson smashes the model of the construction project that threatened their hunting ground, to communicate to them that the threat no longer exists and he and Neff are not enemies. The Wolfen consent, and just as the police barge in, vanish. Wilson claims the attack was made by terrorists.
The story ends on the assumption that Götterdämmerung takes the fall for the serial murders. Wilson's voice is heard, explaining that the Wolfen will continue to prey on weak and isolated members of the human herd, as humans do to each other on social and economic scale. The Wolfen will continue to be invisible to humanity because of their nature; not that of spirits, but superior predators, who are higher on The Food Chain than men.