In 1989, local logger Pete Martell discovers a naked corpse wrapped in plastic on the bank of a river outside the town of Twin Peaks, Washington. When Sheriff Harry S. Truman, his deputies, and doctor Will Hayward arrive, the body is identified as high school senior and homecoming queen Laura Palmer. A badly injured second girl, Ronette Pulaski, is discovered in a fugue state.

FBI Special Agent Dale Cooper is called in to investigate. Cooper's initial examination of Laura's body reveals a tiny typed letter "R" inserted under her fingernail. Cooper informs the community that Laura's death matches the signature of a killer who murdered another girl in southwestern Washington the previous year, and that evidence indicates the killer lives in Twin Peaks.

The authorities discover through Laura's diary that she had been living a double life. She was cheating on her boyfriend, football captain Bobby Briggs, with biker James Hurley, and prostituting herself with the help of truck driver Leo Johnson and drug dealer Jacques Renault. Laura was also addicted to cocaine, which she obtained by coercing Bobby into doing business with Jacques.

Laura's father, attorney Leland Palmer, suffers a nervous breakdown after her death. Her best friend Donna Hayward begins a relationship with James. With the help of Laura's cousin Maddy Ferguson, Donna and James discover that Laura's psychiatrist, Dr. Lawrence Jacoby, was obsessed with her, but he is proven innocent of the murder.

Hotelier Ben Horne, the richest man in Twin Peaks, plans to destroy the town's lumber mill along with its owner Josie Packard, and murder his lover (Josie's sister-in-law), Catherine Martell (Piper Laurie), so he can purchase the land at a reduced price and complete a development project called Ghostwood. Horne's sultry, troubled daughter, Audrey, becomes infatuated with Agent Cooper and spies on her father for clues in an effort to win Agent Cooper's affection.

Cooper has a dream in which he is approached by a one-armed otherworldly being who calls himself MIKE. MIKE says that Laura's murderer is a similar entity, Killer BOB, a feral, denim-clad man with long gray hair. Cooper finds himself decades older with Laura and a dwarf in a red business suit, who engages in coded dialogue with Cooper. The next morning, Cooper tells Truman that, if he can decipher the dream, he will know who killed Laura.

Cooper and the sheriff's department find the one-armed man from Cooper's dream, a traveling shoe salesman named Phillip Gerard. Gerard knows a Bob, the veterinarian who treats Renault's pet bird. Cooper interprets these events to mean that Renault is the murderer, and with Truman's help, tracks Renault to One-Eyed Jack's, a brothel owned by Horne across the border in Canada. He lures Renault back onto U.S. soil to arrest him, but Renault is shot while trying to escape and is hospitalized.

Leland, learning that Renault has been arrested, sneaks into the hospital and murders him. The same night, Horne orders Leo to burn down the lumber mill with Catherine trapped inside and has Leo gunned down by Hank Jennings to ensure Leo's silence. Cooper returns to his room following Jacques's arrest and is shot by a masked gunman.