The film begins with the Joker robbing a mob-owned bank with his accomplices, whom he tricks into killing each other before killing the last one himself. That night, a trio of Batman impersonators interrupts a meeting between mobsters and the Scarecow. The real Batman appears and apprehends all of the criminals and impostors, but suffers injuries from dog bites, leading him to re-design his batsuit. Batman and Lieutenant James Gordon contemplate including new district attorney Harvey Dent in their plan to eradicate the mob, as he could be the public hero Batman cannot be. While hosting a fund raiser for Dent, Bruce Wayne discovers that the new D.A. is dating Rachel Dawes.
When mob bosses meet to discuss Batman, Gordon, and Dent, a Chinese mobster accountant, Lau, informs the gang leaders he has hidden their money to pre-empt a plan Gordon has hatched to seize the mobsters' funds. The Joker arrives unexpectedly, offering to kill Batman for half of their money, but the offer is refused. After Batman successfully abducts Lau in Hong Kong and delivers him to the Gotham City police, the mobsters agree to hire the Joker. The Joker tells Gotham that if Batman does not turn himself in to the police and publicly reveal his identity, people will die each day. When Commissioner Gillian B. Loeb and the judge presiding over the mob trials are murdered, Bruce decides to reveal his identity. Before he can, Dent announces that he himself is Batman and is arrested as part of a plan to draw the Joker out of hiding. The Joker attempts to ambush the police convoy carrying Dent, but Batman and Gordon intervene and arrest him; in recognition of his actions, Gordon is appointed police commissioner.
At the police station, Batman interrogates the Joker, who reveals that Dawes and Dent have been captured by corrupt police and placed in warehouses rigged with explosives on opposite sides of the city; they are far enough apart that Batman cannot save them both. Batman leaves to save Dawes, while Gordon and the police head after Dent. With the help of a bomb planted at the police station, the Joker escapes with Lau. Having been deceived by the Joker, Batman arrives at Dent's location in time to save him, but the left side of Dent's face is burned in the explosion. Gordon does not arrive in time to save Dawes and she perishes. In the hospital, Dent is driven to madness over the loss of Dawes. The Joker frees Dent from the hospital and convinces Dent to exact revenge on the corrupt cops and mobsters responsible, as well as Batman and Gordon.
Dent, calling himself "Two-Face," goes on a personal vendetta confronting the cops and mobsters one by one, and deciding their fates with the flip of a coin. The Joker burns Lau along with his half of the mob's money, and announces to the public that anyone left in Gotham at nightfall will be subject to his rule. With the bridges and tunnels out of the city closed due to the Joker's bomb threat, the authorities begin evacuating people by ferry. The Joker places explosives on two of the ferries—one ferry with convicts, the other with civilians—telling all the passengers the only way to save themselves is to trigger the explosives on the other ferry; otherwise he will destroy both at midnight.
Batman locates the Joker and prevents him from destroying the ferries after the passengers on both decide not to destroy each other. The Joker acknowledges that Batman is truly incorruptible, but that Dent was not, and his madness has been unleashed upon the city. After Batman subdues him and leaves in search of Dent, the SWAT team arrives and arrests the Joker. At the remains of the building where Dawes died, Batman finds Dent holding Gordon and Gordon's family at gunpoint. Dent proceeds to judge the innocence of Batman, himself, and Gordon's son through coin tosses. He shoots Batman in the abdomen, but before Dent can determine the boy's fate, Batman tackles him, both falling over the side of the building. As Dent lies motionless on the ground, Batman and Gordon realize the loss of morale the city would suffer if Dent's acts of murder were to become known. Batman convinces Gordon to preserve Dent's image by holding Batman responsible for the murders. Gordon destroys the Bat-Signal, and a manhunt for Batman ensues.
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