Master Oogway (Randall Duk Kim) is residing in the Spirit Realm. There, he is attacked by Kai (J.K. Simmons), a large yak who was Oogway's ally, but turned against him 500 years ago. Oogway sent him to the Spirit Realm, where he collected the chi of every warrior there. He beats Oogway, and takes his chi, turning him into a jade amulet which Kai wears on a belt along with the rest of the warriors. With Oogway's chi, he is able to open a portal to Earth.
At the Jade Palace, Po (Jack Black), Tigress (Angelina Jolie), Monkey (Jackie Chan), Mantis (Seth Rogen), Viper (Lucy Liu) and Crane (David Cross) order lunch at Mr. Ping's (James Hong) noodle shop, and then go back up the mountain. Po tries to get them to do a dramatic entrance into the palace, and demonstrates by moving to kick open the door, when Master Shifu (Dustin Hoffman) appears in front of him. Shifu does a real dramatic entrance, and then breaks the news that this will be his last day teaching, and that from now on, Po will be their teacher.
Po tries to shout out commands to the team to guide them through an obstacle course, but his commands only make them crash into the obstacles and each other. Po goes to a statue of Oogway and apologizes, and Shifu pops up next to him. Po tells Shifu that he is done with teaching, and Shifu tells him that Oogway named him the Dragon Warrior because he could do more than just fight. Shifu harnesses chi energy to make a flower bloom. Po says he'll never be a good teacher like Shifu, and Shifu replies that he's not trying to turn Po into himself, rather, he's trying to turn Po into Po. Po is thoroughly confused.
Kai goes through the portal and lands on a farm. He tosses his jade amulets on the ground, and they turn into warriors. He instructs them to bring him Oogway's students.
Po is at home taking a bath, and he gets interrupted by Mr. Ling, his adopted father. Po tells him what happened earlier, and that he can't be a teacher. Mr. Ling tells him to take the job, and then Mr. Ling can sell noodles inside the palace. A pig pokes his head in and tells them that someone is about to beat Po's dumpling-eating record. They go downstairs, but can't see who is eating the dumplings. Once the record is broken, Po sees that it is another panda, bigger even than him. The panda introduces himself as Li Shan, (Bryan Cranston) and tells Po that he is looking for his son that he lost many years ago. Po tells him that he lost his father when he was a baby. They wish each other good luck and start to walk away. The other animals in the restaurant shake their heads.
Po and Li stop and look at each other again. They notice each other's green eyes and huge bellies, and realize they're father and son. They hug each other, and Po introduces him to Mr. Ling. Po is unsure what to call them, since they're both his father. Li teaches Po the Belly Gong, where they bump bellies together, and both bellies shake. Po asks an artist to make a sketch of him and Li, but Mr. Ling puts himself in the picture. Li tells Po that there is a secret panda village where he had been living, and that he got a message from the universe that Po would be here. Po leads Li outside to show him around, and Mr. Ling sadly looks at his Po action figure.
Po takes Li to the Jade Palace, and they both get winded climbing up the stairs. Po shows Li all the cool artifacts in the Hall of Heroes. Shifu and the others walk in, and Po introduces his father. Shifu asks if he will stick around to watch Po teach, but then a gong goes off, signaling that the village is under attack. They all go to the village, and find Kai's jade zombies. In battle, Po recognizes that they're fighting the great warriors of the past. The group gets the upper hand and pins down the "jombies," and they all start speaking with Kai's voice. They say that Po's chi will soon be Kai's, and then vaporize and fly away. Shifu tells them he doesn't know who Kai is.
In the scroll room, Shifu finds a scroll that has information about Kai, written by Oogway. "Long ago I had a brother in arms. I was an ambitious young warrior leading a great army. And fighting by my side was Kai, my closest friend. One day we were ambushed. I was badly wounded. My friend carried me for days, looking for help. until we came upon a secret village, high in the mountains. An ancient place of healing. A village of pandas."
"Pandas?" Po asks.
"Yes! Pandas! The pandas used the power of chi to heal me. They taught me the power to give chi. But Kai wanted the power all to himself. He saw that what could be given could also be taken.
On the scroll is a picture of Kai sucking the chi from a panda.
"I had to stop him. Our battle shook the earth. Until finally, I banished Kai to the Spirit Realm. Should he ever return to the mortal realm, he can only be stopped by a true Master of Chi."
The group huddles together to try to figure out how to get a Chi Master, until Li tells Po that he can teach him how to do it by taking him back to the panda village and teaching him how to be a true panda. Mr. Ling tries to protest, but Po tells him that he can only master chi by finding out who he really is. Mr. Ling offers to pack him a lunch before he leaves.
The next morning, Li and Po head for the village, and Shifu sends Crane and Mantis to find Kai, telling them not to engage him. Po and Li are walking through the mountains and decide they should eat lunch. Po finds Mr. Ling inside his lunch sack, and Mr. Ling tells him that he stowed away in case the pandas don't have any food Po likes. They get to the palace, which is behind a giant wall of ice. Li pulls a string, and a bucket comes down. The three of them climb in and are hoisted up into the clouds. Po sees a lush green village with pandas everywhere. Li introduces Grandma Panda, the village elder, and Po's cousins, Dim and Sum. A panda named Big Fun gives Po a big hug, despite not knowing who he is. And Lei Lei, a baby panda, takes Po's Tigress action figure and plays with it. Li announces that they will have a feast in Po's honor, and all the pandas flop to the ground and start rolling downhill. "Pandas don't walk, we roll!" explained Li. The other pandas manage to avoid the rocks and logs on the hill as they roll down. Po plops down on the grass and rolls after them.
The pandas dig into the food at the banquet table, and Mr. Ling hands Po his chopsticks. The other pandas look at him, confused, so he demonstrates how to eat a dumpling with chopsticks. He sees that they have all stuffed a bunch of dumplings into their mouths at once. A gong sounds, and everyone turns to look at a nearby stage. A panda named Mei Mei does a ribbon dance and flirts with Po.
Crane and Mantis are searching for Kai, and they find three kung fu masters in the desert. The group finds an abandoned ship, and the masters run in to attack, despite Crane's warning not to engage. Mantis hears them scream and jumps in to help. Kai steals all of their chi, turning them into jade. Crane flies in, but he soon meets the same fate.
The next day, Po finds some pandas playing with a jianzi, and he joins in and kicks it, sending it straight to Grandma Panda, conking her in the head. They quickly roll away. Li points to Dim and Sum, standing next to two trees with a hammock strung between them. They get into the hammock, and then Li pulls back the trees and launches them up the hill. Awestruck, Po does likewise. Mr. Ling tries to lure him away with food, but Po ignores him.