Reporter Alexander Knox and photojournalist Vicki Vale investigate sightings of the "Batman", a masked vigilante targeting Gotham City's criminals. Both attend a fundraiser hosted by billionaire Bruce Wayne, who is secretly Batman, having chosen this path after witnessing a mugger murder his parents when he was a child. During the event, Wayne becomes infatuated with Vale.
Meanwhile, mob boss Carl Grissom sends his sociopathic second-in-command Jack Napier to raid Axis Chemicals and retrieve incriminating evidence. However, this is secretly a ploy to have Napier murdered for sleeping with Grissom's mistress Alicia Hunt. Corrupt lieutenant Max Eckhardt arranges the hit on Napier by conducting an unauthorized police operation. However, Commissioner James Gordon arrives, takes command, and orders the officers to capture Napier alive. Batman also appears, while Napier kills Eckhardt as revenge for the double-crossing. During a scuffle with Batman, Napier topples off a catwalk and falls into a vat of chemicals. Although presumed dead, Napier survives with various disfigurements including chalk white skin and emerald-green hair and nails. He undergoes surgery to repair the damage, but ends up with a rictus grin. Driven insane by his new appearance, Napier, now calling himself "the Joker", kills Grissom, massacres Grissom's associates, and takes over his operations.
He then starts terrorizing Gotham by lacing hygiene products with "Smylex" – a deadly chemical that causes victims to die laughing. The Joker soon becomes obsessed with Vicki and lures her to the Flugelheim Museum, which his henchmen start vandalizing. Batman rescues Vicki, takes her to the Batcave, and provides her with all of his research on Smylex, which will allow Gotham's residents to escape the toxin. Conflicted with his love for her, Wayne visits her apartment intending to reveal his secret identity, only for the Joker to interrupt the meeting. Joker asks Wayne, "Have you ever danced with the devil in the pale moonlight?", which Wayne recognizes as the catchphrase used by the mugger who killed his parents, realizing the killer to have been Joker (as Napier) all along. He shoots Wayne, who survives thanks to a serving tray hidden underneath his shirt.
Vicki is taken to the Batcave by Wayne's butler, Alfred Pennyworth, who had been coaxing the relationship between the pair. After exposing his secret to Vicki, Wayne reveals he cannot focus on their relationship with Joker on the loose. He then departs to destroy the Axis plant used to create Smylex. Meanwhile, Joker lures Gotham's citizens to a parade honoring Gotham's bicentennial with the promise of free money. This turns out to be a trap designed to dose them with Smylex gas held within giant parade balloons. Batman foils his plan by using his Batwing to remove the balloons, but Joker shoots him down. The Batwing crashes in front of a cathedral, which Joker uses to take Vicki hostage. Batman pursues the Joker, and in the ensuing fight, he explains that Napier killed his parents and thus, indirectly created Batman. This leads Joker to realize Batman is Bruce Wayne. Joker eventually pulls Batman and Vicki over the cathedral's roof, leaving them hanging while he calls in a helicopter. The helicopter is piloted by his goons, who throw down a ladder for him to climb. Batman uses a grappling hook to attach Joker's leg to a crumbling gargoyle that eventually falls off the roof. Unable to bear the statue's immense weight, Joker falls to his death while Batman and Vicki make it to safety.
Sometime later, Gordon announces that the police have arrested all of Joker's men, effectively dismantled of what remained of Carl Grissom's mafia organizations, and unveils the Bat-Signal. Batman leaves the police a note, promising to defend Gotham should crime strike again, and asking them to use the Bat-Signal to summon him in times of need. Alfred takes Vicki to Wayne Manor, explaining that Wayne will be a little late. She responds that she is not surprised, as Batman looks at the signal's projection from a rooftop, standing watch over the city.
