The film begins in medias res, with the silhouette of a man holding onto a rope-like object -- a neck-tie, by which one man is dangling another off the edge of a building. The man holding the neck-tie is Oh Dae-su (Choi Min-sik), who commands the other man to hear his story.
The movie then cuts backward to the year 1988. Dae-su is a Korean businessman with a wife and daughter. On his daughter's fourth birthday, he is picked up by police for being drunk and disorderly. He harrasses several other people at the police station, showing them the angel's wings he bought for his daughter. Finally, he has to be bailed out by his old friend, Joo-Hwan. While Joo-Hwan is in a phone booth talking with Dae-su's daughter, Yeun-Hee, and his wife, Kim Ja-Hyun, Dae-su is kidnapped by unidentified people.
Dae-su next appears in a private prison resembling a shabby hotel room. He has been kept there for two months with no word of who is holding him there or why. He receives food through a small hatch at the bottom of the door, and is gassed into unconsciousness whenever he becomes suicidal, or when his holders need access to the room (e.g. to maintain it; cut his hair). His only contact with the outside world is through the television, from which he learns one day that his wife has been murdered, his daughter has been sent to foster parents and that he is himself the prime suspect; his captors took blood and other items from him, and have presumably left enough evidence at the crime scene to implicate him as the perpetrator. This, together with his continued captivity, causes Dae-su to slide into near-madness and violent hallucinations.
Attempting to get a grip on his sanity and determine his captor, Dae-su fills several notebooks with an autobiography-prison diary, listing everybody whom he could have possibly wronged in the past, but is unable to figure out who would hate him so profoundly as to imprison him like this. From year 5 on, he starts to tattoo lines in his arm for every year he is imprisoned, and forces himself to train by shadowboxing, punching at the walls of his prison until thick calluses form on his knuckles. When one of his deliveries of fried dumplings turns out to have an extra metal chopstick, he conceals it and uses it to slowly dig a hole into one of the walls. Over the next ten years, he works out, follows current events on TV, and loosens enough bricks to glimpse the outside world. He calculates that he will need another month to make the hole large enough to escape.
That night, he is gassed again and a lady hypnotizes him. He wakes up to unfamiliar surroundings. Just as abruptly as he was captured, Dae-su is set free on the rooftop of a building that has been constructed over the place where he went missing. He has a new suit of clothes and his prison diaries. Adjusting to the bright afternoon light, he sees another man sitting on the edge of the building with his small dog. The first human being he has interacted with in fifteen years, Oh Dae-su is taken aback, unable to have a proper conversation with him. We learn that the man is suicidal and says to Dae-su, "Even though I'm no better than a beast, don't I have the right to live?". He then attempts to jump off the edge, but Oh Dae-su grabs his neck tie, saving him from death. Dae-su tells the man to delay his death, because he wants to tell him his story, to which he utters "What?". The scene ends at the point in which the movie began.
After relating his story, Oh Dae-su walks off and out of the building, ignoring the despondent man's plea to listen to his story in turn. As he is leaving the front entrance, the suicidal man lands on a car behind Dae-su, killing himself and his pet. Dae-su pauses, followed by a wide smile. "Laugh and the world laughs with you. Weep and you weep alone", he thinks to himself; a direct quotation from the first line of Ella Wheeler Wilcox's famous poem, Solitude. Throughout the movie, Oh Dae-su uses this quote as a mantra for himself whenever he faces horrible situations.
Wandering the streets of the city, Dae-su does not know what to do with his new-found freedom due to his enemies framing him as the murderer of his wife. When a gang of thugs attack him, he finds that his ten out of fifteen years of solitary training have paid off; he fends them off with only his fists. Next, Dae-su stands on the street looking at fish swimming in an aquarium, when a homeless man walks up and gives him a wallet full of cash and a cellphone. He then meets Mi-do (Kang Hye-jeong), a girl who works in a sushi bar; he recognizes her from a cooking show he often watched while imprisoned, and she says he looks familiar too. An unknown man contacts Dae-su via his cellphone, and claims to be the one who imprisoned him. He mentions it was an experiment, and taunts Dae-su to come and find him and learn the reason for the imprisonment. He gives a mysterious clue: "a grain of sand and a rock both sink in water with the same speed". Dae-su asks Mi-do for something alive to eat, and gulps down an entire living squid, much to Mi-do's shock. Dae-su collapses with a high fever; Mi-do takes pity on him and takes him in.
At her apartment, Dae-su experiences a moment of weakness and tries to sexually assault Mi-do. She fends him off, but understands he did it out of desperation. She tells him that she will make love to him soon, and she will indicate when she is ready for it. Over the next few days, Mi-do does some inquiries and finds out that Dae-su's daughter has been adopted by a couple in Sweden. Dae-su decides not to contact her yet and goes home with Mi-do, only to find out that she has been chatting on her computer for some time with a person, who subsequently reveals to be Dae-su's captor. Dae-su feels he cannot trust Mi-do and leaves.
Based on the taste of the dumplings that he ate for 15 years while imprisoned, and having seen the name "Blue Dragon" on a receipt fragment once, Dae-su goes to various Chinese restaurants with "Blue Dragon" in the name in order to determine exactly which restaurant it was. When he finally finds the right one, called "Magic Blue Dragon", he follows the delivery boy on one of his calls, and finds the prison. Once there, he finds and ties up the prison's manager, Mr Park, and tortures him by pulling out the man's teeth with a claw hammer (15, one for each year he was imprisoned). Mr Park points him to tape recordings, one bearing his name. From the recording, Dae-su learns that the facility is a private prison for people who want someone locked away. His captor had him booked for 15 years and even suggested what drugs to give him if he'd go insane. The only reason the captor would give is: "Oh Dae-su talks too much." Upon leaving, the prison guards gang up on Dae-su, but he fights them all off with nothing more than his clawhammer and his bare fists (although he does get stabbed in the back). Gravely injured, Dae-su is put into a taxi by a man passing by. The man sends the taxi off to Mi-do's exact address, revealing he is Dae-su's captor, but Dae-su is unable to do anything about it in his weakened state.
Back at home, Mi-do nurses him back to health. Dae-su goes to see his old friend Joo-Hwan in his internet shop, and plays the tape recording for him. Joo-Hwan doesn't recognize the voice, but succeeds in identifying Mi-do's on-line chat friend, a person calling himself "Evergreen". They initiate a chat and Evergreen congratulates Dae-su because his wife's murder case has been dismissed, and taunts him some more. Dae-su returns home and tries to violently force more information from Mi-do, still thinking she is working with Evergreen. Suddenly, Joo-Hwan calls, saying that he has tracked down Evergreen's user ID and found the owner's details. The owner's name is 'Su Dae-oh' and there is also an address. Dae-su realizes it is an apartment in the building accross the street from Mi-do's appartment. He rushes off, investigates the apartment and finally meets his captor, a man called Woo-jin (Yu Ji-tae), and his bodyguard, Mr Han, in one of the rooms. Dae-su tries to attack, but is incapacitated by Han. Woo-jin tells Dae-su he cannot kill him, because if he does, he will never learn why he was imprisoned, and if he tries to use torture, Woo-jin will remote-deactivate the pacemaker he had surgically placed in his own chest. But Woo-jin offers to play a game with Dae-su: he must find out why all this happened to him in the next five days. If he fails, Mi-do will die on July 5. If he succeeds, Woo-jin promises to kill himself. While leaving, Woo-jin casually remarks that Dae-su left his front door open.
Dae-su races home and finds that Mr Park and his gang of thugs have captured and sexually abused Mi-do. Dae-su is roughed up, and Mr Park is about to use the same teeth-pulling torture trick on Dae-su, when Mr Han shows up at the door and offers Mr Park a suitcase full of money, if he leaves. Park takes it and while leaving, Dae-su threatens to cut off Park's hand.
Dae-su and Mi-do leave the apartment. On the road, they grow closer together, and Mi-do indicates she is ready to make love. After the love-making, they are gassed and Woo-jin leaves a package in their room. It contains Mr Park's severed hand. Dae-su realizes that Woo-jin can hear every word he says, so he must have bugged him. They go to a shop and have a wire removed from his shoe. The next day, with Mi-do's help, Dae-su finds out that 'Evergreen' refers to his old high school, where he discovers Woo-jin was once a fellow student. He calls his friend Joo-Hwan, who confirms the finding, and mentions that Woo-jin's sister, who attended the school at the same time and had a promiscuous reputation, killed herself later. However, due to the not being able to spy on Dae-su anymore, Woo-jin has gone to Joo-Hwan's internet shop, and enraged over the comments made about his sister, he beats Joo-Hwan to death while having Dae-su listen over the phone.
Strongly suspecting that the reason for his imprisonment has something to do with the sister's death, Dae-su tracks down Mr Park. Due to losing a hand to Woo-jin, he is cooperative now and agrees to hold Mi-do in Dae-su's old prison facility to keep her safe from Woo-jin. He also confirms that Dae-su was drugged and hypnotized several times while imprisoned. Dae-su finds another classmate and discusses Woo-jin and his sister with her. Apparently, there were growing rumors about the sister's sex life and her possibly being pregnant at the time. The rumors were spread by Joo-Hwan, but it seems Dae-su himself was the source. Then he has a sudden recollection of memory. One day at school, as it turned out, Dae-su had unintentionally witnessed Woo-jin and his sister Soo-ah while engaging in a sexual encounter. Not knowing at the time that the two were related and the scene he was witnessing was an instance of incest, Dae-su casually mentioned what he had seen to one of his own friends, just before transferring to a school in Seoul. Eventually, the rumor started a life of its own and Soo-ah threw herself over a dam on July 5, killing herself. Dae-su finally realizes the solution to the first clue: "a grain of sand and a rock both sink in water with the same speed", means that a casual remark and an outright accusation may both have the same devastating consequences to a person, so Woo-jin holds Dae-su responsible for his sister's death.
Dae-su finally finds out where Woo-jin lives, and confronts him with all of this information. He accuses Woo-jin of creating a search for a memory that was erased using hypnosis; but Woo-jin claims not to have messed with Dae-su's memory, Dae-su had simply forgotten it himself because he thought it was insignificant. However, his litlle slip of the tongue grew out of proportion, to the point where it was rumored that Soo-ah had become pregnant. It was never clear whether this had in fact occurred, but believing it and fearing public humiliation, she killed herself. Dae-su, however, implies that Woo-jin killed his own sister, afraid of fathering her child, and tried to shift the blame to Dae-su to cope with the guilt. Woo-jin does indeed possess a photo of Soo-ah on the dam, dated the day of her death, July 5. He took the picture, so he was present at her suicide. But Woo-jin then side-steps these allegations with an even more devastating revelation. He gives Dae-su a photo album, the first picture of which is a family portrait of himself, his wife, and his daughter. The remaining photos in the album are of his daughter growing older, until in horror Dae-su discovers that his daughter is none other than Mi-do (at the same time, Mi-do finds angel's wings in a bag, the same Dae-su had bought for her 4th birthday). By carefully manipulating both of their lives - secretly taking care of Mi-do from the age of 3 (probably the reason for 15 years, 3+15=18) - Dae-su's since his incarceration and Mi-do's since her father vanished - and hypnotizing each of them independently, Woo-jin was able to cause Dae-su and Mi-do to commit incest as well. Dae-su goes into a rage and fights with Mr Han. Despite being mortally wounded, Mr Han keeps him subdued, until Woo-jin shoots and kills him.
Dae-su then learns that Mr Park is still working for Woo-jin, having been granted the ownership of the prison in exchange for severing his hand. Mr Park is with Mi-do, and is ordered to give a similar album to her at Woo-jin's command. Dae-su is horrified, and begs Woo-jin not to let this happen. He then gets on his hands and knees and starts to bark like a dog, eventually going so far as to cut off his own tongue so that he will never talk too much again. During this scene Woo-jin holds a handkerchief to his mouth, and it looks as if he is crying, but then it shows clearly he is laughing with smugness and struggling to hide it so he can continue to watch Dae-su torture himself. With his thirst for vengeance that was his sole reason for living finally spent, Woo-jin spares Mi-do from knowing and readies to kill himself and Dae-Su with the same bullet. He changes his mind, however, and gives Dae-su the remote switch to his own pacemaker. Dae-su immediately grabs it and uses it, only to find that it doesn't kill Woo-jin, but activates a tape recorder. Woo-jin exits the penthouse in an elevator, leaving Dae-Su alone to be tormented by a tape recording of his incestuous love-making with his own daughter.
As Woo-jin leaves, we are taken back into his guilt-ridden memory of his sister's death. He is holding Soo-ah over the dam, trying to save her from killing herself, and she says that she has always known that Woo-jin was afraid, that she regrets nothing and asks him to let go of her. She seems at peace, and eventually he releases his grip. Back in the elevator, Woo-jin realizes that even after getting his revenge against Dae-Su, nothing will take his pain away. The camera is focused on his open hand, which slowly closes as if around a gun, cocks an imaginary hammer -- and fires the real gun into his head in the elevator.
In an epilogue set in a wintry landscape, Dae-su goes to a hypnotist (the same one whom Woo-jin hired to hypnotize both Dae-su and Mi-do) and asks for her help to forget the secret. He writes her a letter, since he can no longer talk. The hypnotist said that she originally did not want to help him, but she was touched by his last sentence: "Even though I'm no more than a beast, don't I, too, have the right to live?". It is the same sentence Oh Dae-su heard from the suicidal man who appeared at the beginning of the movie.
The hypnotist tells Oh Dae-su to imagine himself back at Woo-jin's penthouse. She uses hypnosis to split Dae-su into two personalities: the "Beast", who remembers the secret, and the "ignorant" Dae-su, who doesn't know.
When the hypnotist asks Dae-su to split into the two people, a reflection of himself appears in the window. The hypnotist tells him that the monster will walk away and for every step he takes, he will age a year and die when he reaches 70. The reflection is the "Beast" - he holds a grim expression and remains unmoved, unwilling to leave his place in Dae-su's mind. The "ignorant" Dae-su, reflected in the glass, mourns the loss of a major part of his life. The camera cuts to the cassette player which then finishes playing the music that has set the scene. Oh Dae-su is wished the best of luck, and the screen turns black.
Dae-su wakes up. The hypnotist has already gone, and he is left lying on the cold ground with a delirious feeling. He stumbles about, and finally with some hesitation he meets up with Mi-do and they embrace. The soft spoken Mi-do tells Dae-su that she loves him, and a large smile appears on his face, which slowly disintegrates into a tortured grimace.