In 2154, Earth's natural resources have been depleted. The Resources Development Administration (RDA) mines the valuable mineral unobtanium on Pandora, a moon in the Alpha Centauri star system. Pandora, whose atmosphere is poisonous to humans, is inhabited by the Na'vi, 10-foot-tall (3.0 m), blue-skinned, sapient humanoids that live in harmony with nature. To explore Pandora, genetically matched human scientists use Na'vi-human hybrids called "avatars". Paraplegic Marine Jake Sully is sent to Pandora to replace his deceased identical twin, who had signed up to be an operator. Avatar Program head Dr. Grace Augustine considers Sully inadequate but accepts him as a bodyguard.

While escorting the avatars of Grace and Dr. Norm Spellman, Jake's avatar is attacked by Pandoran wildlife and he flees into the forest, where he is rescued by female Na'vi Neytiri. Witnessing an auspicious sign, she takes him to her clan. Neytiri's mother Mo'at, the clan's spiritual leader, orders her daughter to initiate Jake into their society. Colonel Miles Quaritch, head of RDA's security force, promises Jake the company will restore his legs if he provides information about the Na'vi and their gathering place, the giant Hometree, under which is a rich deposit of unobtanium. Learning of this, Grace transfers herself, Jake, and Norm to an outpost. Jake and Neytiri fall in love as Jake is initiated into the tribe. He and Neytiri choose each other as mates. When Jake attempts to disable a bulldozer which is threatening a sacred Na'vi site, Administrator Parker Selfridge orders Hometree destroyed. Despite Grace's argument that destroying Hometree could damage Pandora's biological neural network, Selfridge gives Jake and Grace one hour to convince the Na'vi to evacuate.

Jake confesses that he was a spy and the Na'vi take him and Grace captive. Quaritch's men destroy Hometree, killing many including Neytiri's father, the clan chief. Mo'at frees Jake and Grace, but they are detached from their avatars and imprisoned by Quaritch's forces. Pilot Trudy Chacón, disgusted by Quaritch's brutality, airlifts Jake, Grace, and Norm to Grace's outpost. Grace is shot during the escape. Jake regains the Na'vi's trust by connecting his mind to that of Toruk, a dragon-like creature feared and revered by the Na'vi. At the sacred Tree of Souls Jake pleads with Mo'at to heal Grace. The clan attempts to transfer Grace into her avatar with the aid of the Tree of Souls but she dies. Supported by new chief Tsu'tey, Jake unites the clan, telling them to gather all the clans to battle the RDA. Quaritch organizes a strike against the Tree of Souls to demoralize the Na'vi. Jake prays to Na'vi deity Eywa via a neural connection with the Tree of Souls. Tsu'tey and Trudy are among the battle's heavy casualties.

The Na'vi are rescued when Pandoran wildlife unexpectedly join the attack and overwhelm the humans, which Neytiri interprets as Eywa answering Jake's prayer. Quaritch, wearing an AMP suit, escapes his crashed aircraft and breaks open the avatar link unit containing Jake's human body, exposing it to Pandora's poisonous atmosphere. As Quaritch prepares to slit Jake's avatar's throat, he is killed by Neytiri who saves Jake from suffocation, seeing his human form for the first time. With the exceptions of Jake, Norm, and a select few others, all humans are expelled from Pandora. Jake is permanently transferred into his avatar with the aid of the Tree of Souls.