The story begins with Mortimer "Mo" Folchart (Brendan Fraser) and his wife Resa (Sienna Guillory) reading a bedtime story Little Red Riding Hood to their infant daughter Meggie. As Mo reads the story, a red velvet hood appears, unbeknownst to the family as a narrator explains that people known as "Silver Tongues" are born with the gift that whenever they read a story aloud, their elements come into reality, and that some are completely unaware of their gifts.
Flash forward 12 years into the future, Mo and Meggie (Eliza Bennett) are trolling the European countrysides in hopes of finding a book for which Mo has been looking for years. He has come to learn of his gifts, and nine years prior, Resa had vanished, much to the chagrin of her extended family. Hearing the calling of books from a bookstore one day, Mo, a reputed book repairer, leaves Meggie outside and ventures inside after being offered to browse the shelves. He finds the book "Inkheart" in the stock and is overwhelmed with a mixture of fear and joy.
At the same time, Dustfinger (Paul Bettany), a character from Inkheart appears and attempts to persuade Mo to read him back into the book. Mo refuses to do so and hastily escapes with Meggie and travels to Italy to pay a visit to Meggie's great aunt Elinor Loredan (Helen Mirren). Elinor accuses Resa of running off, which upsets Meggie, but the two make amends when expressing their mutual passion for valuable books, and Elinor lets Meggie stay in her library to read. Dustfinger appears again, but this time having informed the book's villain Capricorn (Andy Serkis) and bringing his minion Basta (Jamie Foreman) to capture Mo and his family and take back the book, in the meantime destroying Elinor's valuable collection of books.
The trio are taken to Capricorn's castle, and imprisoned in the stables, which house various creatures from storybooks, such as the ticking Crocodile from Peter Pan and the title character of The Hound of the Baskervilles as well as the minotaur from the poem of Theseus. Mo explains to Meggie and Elinor about his gift, he states that when he reads a person out of the book, either intentionally or unintentionally, someone from the real world is sent into it, hence the disappearance of his wife, and from the day of her disappearance nine years prior, he had not read to Meggie from any story. They are abruptly taken to meet with Capricorn, and meet his current reader Darius (John Thomson), whose perpetual stutter had caused all of those he had read out of the book to only come halfway out of the story, with various deformities and the words of the stories written on their faces. Capricorn breaks his promise to Dustfinger to have him read back into the book, and throws it onto the fire, burning it. In his despair, Dustfinger leaves the group and runs to the kitchen, where he learns that one of the servant girls, a trusted friend of his who is constantly attempting to escape, is in fact Mo's lost wife Resa, whose halfway transition from the book she was trapped in has left her without a voice. He gives her the access to escape and departs.
After reading from Arabian Nights and giving Capricorn a stash of treasure, one of Ali Baba's thieves, Farid (Rafi Gavron), is summoned from the story and joins the storyteller and his family in imprisonment. Dustfinger opts not to tell Mo that his wife is in the village(risking losing his wife all over again) and prompts a quick escape using the famous cyclone from The Wizard of Oz. After they escape, Meggie offers the idea that only the author of Inkheart, Fenoglio (Jim Broadbent – a fictional character, unrelated to the Italian writer Beppe Fenoglio) may have access to a copy of the rare-to-find book.
After learning of the author's location and traveling to his town, Elinor decides to leave to recover what is left of her book collection. Dustfinger stays behind with Farid partly in order to teach him how to juggle fire, but also due to the fact he is afraid of learning his fate at the end of the book. Fenoglio cannot resist approaching his creation and inadvertently blurts out that Dustfinger dies in the novel while saving his marten Gwin. This devastates the fire juggler, who states that the writer is not his god, and he can deem whatever fate he chooses. While Mo attempts to find a way of reading Resa out of the book, Dustfinger has no choice but to confess that she was at Capricorn's village, prompting him and Mo to take Fenoglio's car and leave Meggie behind with Fenoglio. They discover, that Farid had stowed away in the car's trunk, and take him along at his insistence to help. Elsewhere, Elinor has a change of heart and does not take the train back to Italy.
Meanwhile, Meggie learns that she has inherited her father's gift when she accidentally summons Toto from the Wizard of Oz. Basta comes and takes the both of them back to Capricorn's village. Capricorn intends to use Meggie to read the Shadow, Inkheart's supernatural and most deadly villain, out of the book and into the real world, using a copy of the book he had unknowingly kept to himself. After a brief reunion with her mother, Meggie is coerced into cooperating or risk Capricorn killing Resa. Elinor in the meantime discovers Fenoglio's ransacked apartment and rents a motorbike to save her family. As Mo, Farid and Dustfinger work on a plan of burning down Capricorn's castle, Dustfinger is captured. After escaping his cell, he attempts to free Meggie and Fenoglio who is working on a way to rewrite the ending of the Shadow for her to read. He is unable to free them, and flees, only to return at his conscience (or perhaps Meggie's) beckoning.
Meggie is dressed elegantly and escorted out to read the Shadow out of the book, and Fenoglio and Resa are caged to be his first meal. Fenoglio manages to use Toto to give her a page that he had written, and she manages to call off the Shadow. In the scuffle, she loses the rewrite and Shadow attempts again to kill Resa, Fenoglio, and Mo, who had intervened in the fight. Mo gives Meggie a pen to write her own ending, and using her arm, Meggie manages to send all the book characters back to their own stories, and at Fenoglio's request, sends him into the Inkheart world as well. Dustfinger misses his chance to return, and departs when Elinor, Resa, Mo and Meggie embrace, where Meggie discovers that Inkheart had been taken.
Farid catches up with Dustfinger, insisting on travelling with him to find another reader to send him back into the book, which he had stolen, noting he will remember Meggie after having also stolen Mo's wallet with a picture of her inside. After a moment's hesitation, Dustfinger agrees, and the two start off together, only to have Mo come up to fulfill his promise to return Dustfinger to his book. Dustfinger is transported safely back into Inkheart, where he reunites with his wife Roxanne (Jennifer Connelly). Farid reveals to the family that Dustfinger's fate has been changed, as he pulls Gwin out of a travel pack he is carrying, and without the marten to sacrifice himself to, Dustfinger is again in control of his destiny. Meggie and Resa invite Farid to live with them, and Meggie agrees to teach him how to read and Farid agrees to teach her how to use the dragon fire.
