The Castle of Otranto tells the story of Manfred, lord of the castle, and his family. The book begins on the wedding day of his sickly son Conrad and princess Isabella. Shortly before the wedding, however, Conrad is crushed to death by a gigantic helmet that falls on him from above. This inexplicable event is particularly ominous in light of an ancient prophecy, "that the castle and lordship of Otranto should pass from the present family, whenever the real owner should be grown too large to inhabit it". Manfred, terrified that Conrad's death signals the beginning of the end for his line, resolves to avert destruction by marrying Isabella himself, while divorcing his current wife, Hippolita, who he feels has failed to bear him a proper heir in light of the sickly condition of Conrad before his untimely death.
However, as Manfred attempts to marry Isabella, she escapes to a church with the aid of a peasant named Theodore, who had correctly identified the giant helmet that had killed Conrad as having coming from the giant statue standing before the church. Manfred accuses Theodore of having sorcerous responsibility for the helmet having been summoned, and orders Theodore's death, while talking to the friar Jerome, who ensured Isabella's safety at the church. When Theodore removes his shirt to be killed, Jerome recognizes a mark below his shoulder and identifies Theodore as his own son, and thus being of noble birth. Jerome, who has revealed himself to be of noble rank, begs for his son's life, but Manfred says Jerome must either give up the princess or his son's life. They are interrupted by a trumpet and the entrance of knights from another kingdom, who want to deliver Isabella to her father, Frederic, along with the castle, as Frederic has a stronger claim to it (another reason Manfred wishes to wed Isabella). This leads the knights and Manfred to race to find Isabella.
Theodore, having been locked in a tower by Manfred, is freed by Manfred's daughter, Matilda. He races to the underground church and finds Isabella. He hides her in a cave and blocks it to protect her from Manfred and ends up fighting one of the mysterious knights. Theodore badly injures the knight, who turns out to be Isabella's father, Frederic. With that, they all go up to the castle to work things out. Frederic falls in love with Matilda, and he and Manfred make a deal to marry each other's daughters. Frederic backs out after being warned by an apparition of a skeleton.
Manfred, suspecting that Isabella is meeting Theodore in a tryst in the church, takes a knife into the church, where Matilda is meeting Theodore. Thinking his own daughter is Isabella, he stabs her. Theodore is then revealed to be the true prince of Otranto as Matilda dies, leaving Manfred to repent. A giant ghostly form appears, declares the prophecy fulfilled and shatters the castle walls.
Manfred abdicates the principality and retires to religion along with Hippolita. Theodore becomes prince of the remains of the castle and is married to Isabella, for she is the only one who can truly understand his sorrow.
