Following the impact of a meteorite into Earth 65 million years ago, the universe is split into a pair of parallel dimensions. Surviving dinosaurs escape into the new dimension, evolving into a humanoid race and founding a city known as Dinohattan. In 1973, a mysterious woman leaves a large egg and a fragment of the meteorite at a Catholic orphanage in Brooklyn, New York City. The egg hatches into a baby girl. Twenty years later, Italian-American brothers Mario and Luigi working as plumbers in Brooklyn are close to being driven out of business by mafioso Anthony Scapelli's construction company. Luigi meets Daisy, a New York University archaeology student who shows him she has been excavating for dinosaur bones under the Brooklyn Bridge. There, they witness Scapelli's cronies sabotaging it by leaving the water pipes open. Mario and Luigi fix it, but Iggy and Spike —henchmen and cousins of President "King" Koopa, the illegitimate leader of the other dimension—kidnap Daisy after mistakenly kidnapping other girls, including Mario's girlfriend, Daniella. The duo pursues them through an interdimensional portal to Dinohattan, where they lose track of Daisy and her necklace, which is stolen by Big Bertha, the bouncer of a local nightclub. Daisy learns she is descended from dinosaurs and the long-lost princess of the other dimension. Her father, the king, was devolved by Koopa, then a general in the king's army, into a fungus that has since spread across Dinohattan; her mother, the queen, took her to Brooklyn, only to be crushed to death when the portal was sealed. Iggy and Spike realize that they lost Daisy's necklace, which contains a fragment of the meteorite that will allow it to merge the dimensions. They believe only Daisy can do so because of her royal heritage. Mario and Luigi break out of the city's local prison and go to rescue Daisy, aided by the fungus as well as Toad, a good-natured guitarist who was devolved into a Goomba, a semi-humanoid dinosaur, as punishment for his protests against Koopa. Daisy's escape attempt is aided by Yoshi, a pet of the royal family, and Iggy and Spike, who decide to turn on Koopa following their cousin's use of the (d)evolution gun to enhance their intelligence. While Luigi rescues Daisy, Mario saves Daniella and the other girls who were mistaken for the princess. Koopa's jealous girlfriend, Lena, tries unsuccessfully to kill Daisy, then obtains the fragment with plans to overthrow him, but is fossilized when she merges the dimensions. In Brooklyn, Koopa attempts his takeover, but Luigi and Daisy remove the fragment from the meteorite, and the dimensions separate. Toad gives Mario and Luigi handheld devolution devices, and they defeat Koopa by devolving him into a Tyrannosaurus rex, then primeval slime. Daisy's father is evolved back to normal and regains his position. The citizens celebrate and immediately destroy anything involving Koopa. Daisy decides to stay in Dinohattan and kisses Luigi goodbye as she opens the portal for him and Mario to return home. Three weeks later, the Mario brothers are heralded as heroes. Daisy arrives at Mario and Luigi's apartment in Brooklyn and asks them to help her on a new mission. In a post-credits scene, two Japanese businessmen approach Iggy and Spike for permission to develop a video game based on their experiences; they christen the game Super Koopa Cousins.

The film begins with an introduction that highlights its interactive aspect and introduces the Oogieloves: Goobie, Zoozie, and Toofie. The Oogieloves wake to prepare a surprise birthday party for their living pillow Schluufy, with the aid of magical window Windy Window, vacuum cleaner J. Edgar and grumpy pet fish Ruffy. However, J. Edgar accidentally releases the five magical balloons they bought for the party, so the Oogieloves set out to retrieve them with Ruffy. The first balloon is found at the treehouse home of Dotty Rounder, who is obsessed with circles and polka dots, and her granddaughter Jubilee, who is obsessed with squares. The second is found at the milkshake cafe of Milky Marvin, who is holding a milkshake-drinking contest to win the second balloon in which the Oogieloves and their fish participate. The third balloon is found in possession of Rosalie Rosebud, a pop singer who denies her allergy to roses. The fourth balloon is tied to the truck of Bobby Wobbly, a bubble-selling cowboy with an unusual walk. The last balloon is found on top of a windmill, where the Oogieloves retrieve it with the help of Lola and Lero Sombrero, who ride a giant flying sombrero. Just before they reach home with all the balloons, the Oogieloves accidentally release them again but blow kisses to persuade them to return. They then hold the surprise party for Schluufy, who did not wake until just before their return.