An airship carrying Sheeta – an orphan girl abducted by government agent Muska – is attacked by air pirate Dola and her gang, who seek Sheeta's crystal necklace. Attempting to escape, Sheeta falls from the airship but is saved by the magic of the now-glowing crystal, which lowers her gently. Pazu, an orphan working as a mechanic in a 19th-century mining town, catches Sheeta and takes her to his home to recover. The next morning, Pazu shows Sheeta a picture his father took of Laputa, a mythical castle on a flying island, which Pazu now seeks. Dola's gang and Muska's soldiers shortly arrive looking for Sheeta. Pazu and Sheeta are chased through the town and fall into a mine shaft, but are saved again by the crystal. In the tunnels, they meet Uncle Pom, who shows them deposits of the glowing mineral Aetherium, the same material as Sheeta's crystal.
Sheeta reveals to Pazu that she has a secret name tying her to Laputa, proving the myth is real. The army captures and detains the two in a fortress. Muska shows Sheeta a dead robot that fell from the sky, bearing the same insignia as on Sheeta's crystal, and reveals she is the heiress to the Laputan throne. Muska releases Pazu in exchange for Sheeta guiding the army to Laputa. Returning home, Pazu is captured by Dola's gang, who prepare to take the crystal from the fortress. Pazu joins the gang in an attempt to save Sheeta. In the fortress, Sheeta recites an ancient phrase her grandmother taught her and inadvertently activates the crystal's magic, reanimating the robot. The robot protects Sheeta from the army and destroys the fortress with its weapons, but is destroyed in turn by the military airship Goliath. In the chaos, Pazu and Dola rescue Sheeta. However, Sheeta's crystal is left behind, its magic still active, which allows Muska to use it to navigate to Laputa.
Sheeta, having seen the crystal's directions and being able to navigate to Laputa, helps Pazu convince Dola to take them there in exchange for temporarily joining her crew. That night, Sheeta and Pazu keep watch from the crow's nest as Goliath suddenly attacks Dola's airship. Dola detaches the crow's nest, which also functions as a glider attached to the ship with a line. Pazu spots a massive storm, wherein he believes his father saw Laputa. Dola attempts to steer into the clouds, but is halted by violent winds. Goliath destroys the airship, severing the line connecting it to the glider. Sheeta and Pazu pass through the turbulent lightning storm.
They land safely on Laputa, which they find deserted but for some fauna and one peaceful robot. The castle is in ruins, and a giant tree now grows out of the top of the island. The army arrives and begins looting the castle, having taken Dola's gang captive. Muska and his accomplices betray the army, destroying their communication systems, and take Sheeta into the castle's core. Pazu frees Dola's gang from their bindings and pursues Muska. The castle's core is the center of Laputa's ancient knowledge and weapons, which Muska activates using Sheeta's crystal, revealing to her that he is also a descendant of the Laputan royal line. Demonstrating Laputa's power by causing a massive explosion over the ocean and by destroying Goliath, Muska plans to use Laputa to destroy humanity, believing them inferior to himself and Sheeta. A horrified Sheeta takes back the crystal and flees, but Muska intercepts her in Laputa's throne room.
Pazu reaches the throne room and bargains for a brief truce. Sheeta teaches Pazu another ancient phrase, the spell of destruction. The spell sends Muska falling to his death, with the giant tree shielding Sheeta and Pazu from Laputa's destruction. The rest of the castle – along with Dola's glider – is preserved by the giant tree, and the island rises into space. Sheeta, Pazu, and Dola's gang escape, and briefly reunite before flying away.