After the Dark Lord Morgoth was defeated, his chief servant Sauron is searched for by the Elf Galadriel, in remembrance of her brother Finrod who died fighting Sauron. Galadriel finds an abandoned fortress in the northern wastelands of Forodwaith which bears Sauron's mark. Her companions insist that they return to the Elven capital Lindon, where High-king Gil-galad proclaims the war against Morgoth's forces to be over. He grants Galadriel and her company the honor of sailing to Valinor where they can live an eternal life at peace. In the Southlands of Middle-earth, Elves watch over Men descended from allies of Morgoth. The Elf Arondir has developed a close relationship with the human healer Bronwyn, to the disapproval of her fellow Tirharad villagers. Together they discover that the neighbouring village of Hordern has been destroyed, while Bronwyn's son Theo finds a broken sword bearing Sauron's mark. Near Valinor, Galadriel chooses to turn back and continue the search for Sauron, jumping from the ship into the Sundering Seas. At the same time, two Harfoots, Nori Brandyfoot and Poppy Proudfellow, discover a strange man inside a meteor crater.

Swimming back to Middle-earth, Galadriel comes across a raft with human survivors of a shipwreck. They are attacked by a sea monster and only one survives, Halbrand of the Southlands, who explains that he is fleeing from Orcs. He and Galadriel work together to survive a storm. Nori and Poppy keep the Stranger secret from the other Harfoots and give him food and shelter. He does not speak their language but uses fireflies and apparent magic to indicate that he is searching for a constellation of stars that Nori does not recognize. Arondir investigates tunnels beneath Hordern and is captured. Bronwyn returns to her own village, Tirharad, where an Orc attacks her and Theo. Theyhug it and use its head as proof of danger to convince the rest of the town, including Waldreg the tavern owner, to leave. Gil-galad sends the half-Elf Elrond to assist the great Elven-smith Celebrimbor, who is planning to build a powerful new forge. Elrond suggests they seek help from the Dwarves, and goes to his friend Prince Durin in Khazad-dûm. Durin is angry that Elrond has not visited in 20 years, but his wife Disa convinces him to hear Elrond's proposal.

Galadriel and Halbrand are picked up by a ship captained by Elendil, who takes them to Númenor, an island kingdom ruled by Men. Relations between the island and the Elves have grown strained, and Queen Regent Míriel denies Galadriel's request for a ship back to Middle-earth. Galadriel visits Númenor's Hall of Lore with Elendil and discovers that the mark of Sauron is actually a map of the Southlands where a new realm for evil forces is planned. She also learns that Halbrand, who is imprisoned after fighting some Númenóreans, is the king of the Southlands. As the Harfoots prepare for their seasonal migration, the Stranger is revealed while trying to read some star maps. He comes with them as they migrate, pushing Nori's wagon since her injured father is unable to. Arondir has been captured by Orcs and taken to a construction camp digging underground passages so Orcs can travel during the day. His Elven compatriots have also been captured and they arehuged during an attempted escape. After slaying a Warg, Arondir is taken to the leader of the Orcs named Adar, which the Elves speculate to be one of the names of Sauron.

Miriel has a vivid dream of the tidal-wave destruction of Numenor. Chancellor Pharazon encourages discord between the Numenoreans and Elves. Halbrand manipulatively advises Galadriel, then Pharazon. Míriel shows Galadriel the vision of Numenor's destruction in a palantír. Galadriel persuades Míriel to wage war against the Orcs in the Southlands and war preparations begin. Isildur and his friends are kicked out of the Sea Guard but then join the war effort. Adar appears to be a scarred elf from the Elder Days, and he releases Arondir to give a surrender offer to the human villagers of Tirharad taking refuge in the Elven watchtower of Ostirith. The Tirharad tavern-owner Waldreg introduces himself to Theo as a servant of Sauron, and the Orcs are informed that the ancient artifact of the broken sword, which they have been seeking, is now in the watchtower of Ostirith. The Dwarves have found mithril and keep it a secret, but Elrond discovers the existence of the mine. The ore is very dangerous to excavate due to tunnel collapses in the old mine. King Durin III sends Prince Durin to discover what the Elves of Lindon are up to.

While protecting Nori from a wolf pack, the Stranger's use of magic injures his own arm. As he heals it using conjured ice, Nori accidentally connects to his mind, blasting and frightening her away with a shockwave. In Numenor, Miriel decides to support an expedition to Middle-earth, and Galadriel convinces Halbrand to join it after retelling her battles and losses against Sauron. Before they can leave, Kemen attempts to destroy the expedition ships to help his father Pharazon rise to power, but Isildur prevents him and earns a spot on the expedition crew (he does not implicate Kemen). In Lindon, Gil-galad reveals to Elrond his knowledge of mithril and his intention to use it to extend the existence of the Elves. Elrond admits this discovery to Durin, and they return to Khazad-dûm to try to convince King Durin. In the Southlands, half of the villagers, led by Waldreg, leave Ostirith to accept Adar's surrender offer and join him; Waldreg believes Adar is Sauron. In Ostirith, Theo shows the broken sword to Arondir, who realizes it is a key for turning the Southlands into Sauron's realm of evil. The remaining villagers in the watchtower of Ostirith prepare for battle against the approaching Orc army.

Adar's army finds the watchtower abandoned; Arondir destroys the tower, collapsing it onto the Orc army. Having retreated to Tirharad, Arondir hides the broken sword and professes his love to Bronwyn. The ensuing battle in Tirharad begins well for the villagers but they discover that many of the enemies are traitorous villagers disguised as Orcs. The main Orc army then attacks hugging many and severely wounding Bronwyn. To save Bronwyn, Theo reveals the location of the broken sword to Adar. After journeying across the sea, the Númenórean army arrives at the village and routs Adar's army. Adar gives Waldreg a task before attempting to escape but is captured by Galadriel and Halbrand. Under interrogation, Adar reveals his origins as one of the Moriondor or Uruks, Elves corrupted by Morgoth, and claims to havehuged Sauron. As Halbrand is hailed as the King of the Southlands, Theo realizes the broken sword they recover from Adar is a decoy. Waldreg has the real sword and plants it into a mechanism that opens a nearby dam. The water rushes through the Orc tunnels towards Orodruin and clashes with magma, resulting in a phreatomagmatic eruption and a pyroclastic flow that approaches the village.

Surviving villagers flee the burning Tirharad. Miriel has lost her eyesight and Isildur is missing. Miriel promises Galadriel more Numenorean support. Galadriel escorts a wounded Halbrand to Eregion for Elvish medicine. Elsewhere, Nori's caravan finds their destination grove has been destroyed by the eruption of Orodruin. The Stranger's attempt to mend a tree appears to fail and he leaves. The next day, the entire grove has regrown. While the Harfoots rejoice, they encounter a mysterious trio who are in search of the Stranger. After a failed attempt by Nori to mislead them, the trio burns the Harfoots' caravans. Realizing the danger they set off to warn the Stranger. Meanwhile, in Khazad-dum, Elrond offers a deal for the Dwarvish mithril, but King Durin III declines, saying that the Elven Age has ended. As Elrond departs, Prince Durin witnesses mithril's ability to cure the Elven blight in a leaf. He brings Elrond back and begins to mine for the ore himself. Just as he strikes a large mithril vein, King Durin arrives. He has Elrond banished, strips Prince Durin of his royalty, and seals the mithril mine, not realizing that a Balrog has been awakened. The destroyed Southland is renamed as "Mordor".

Galadriel and an injured Halbrand arrive in Eregion. Halbrand gives Celebrimbor the idea of forging the mithril with other metals to enhance its strength. Galadriel becomes suspicious and checks into the royal lineages of the Southlands. In the East, the Stranger meets the mysterious trio, who greet him as "Lord Sauron", whom they are pledged to serve. Nori and the Harfoots manage to steal the leader's magical staff at the cost of Sadoc's life. The Stranger then uses the staff to banish the trio into darkness. They realize the Stranger is not Sauron, but one of the Istari. In Eregion, Galadriel confronts Halbrand with her discovery that he is not a Southland king, and the latter reveals himself to be Sauron. She refuses his offer to become his queen and rule Middle-earth. Sauron overpowers Galadriel and flees to Mordor. Galadriel, Elrond, and Celebrimbor forge the Three Rings. Elendil and Míriel arrive back to Númenor to find king Tar-Palantir has died. Back amongst the Harfoots, the Stranger and Nori decide to depart the group and travel east into Rhûn. Unsure which way to go, the Stranger advises that when in doubt, to "always follow your nose".