Thomas Fowler is a British journalist in his fifties who has covered the French war in Vietnam for more than two years. He meets a young American idealist named Alden Pyle, a CIA agent working undercover. Pyle lives his life and forms his opinions based on foreign policy books written by York Harding with no real experience in Southeast Asia matters. Harding's theory is that neither communism nor colonialism are proper in foreign lands like Vietnam, but rather a "Third Force"—usually a combination of traditions—works best. When they first meet, the earnest Pyle asks Fowler to help him understand more about the country, but the older man's cynical realism does not sink in. Pyle is certain that American power can put the Third Force in charge, but he knows little about Indochina and is recasting it into theoretical categories.
Fowler has a live-in lover, Phuong, who is only 20 years old and was previously a dancer at The Arc-en-Ciel (Rainbow) on Jaccareo Road, in Cholon. Her sister's intent is to arrange a marriage for Phuong that will benefit herself and her family. The sister disapproves of their relationship, as Fowler is already married and an atheist. So, at a dinner with Fowler and Phuong, Pyle meets her sister, who immediately starts questioning Pyle about his viability for marriage with Phuong. Towards the end of the dinner, Pyle dances with Phuong, and Fowler notes how poorly the upstart dances.
Fowler goes to Phat Diem to witness a battle there. Pyle travels there to tell him that he has been in love with Phuong since the first night he saw her, and that he wants to marry her. They make a toast to nothing and Pyle leaves the next day. Fowler gets a letter from Pyle thanking him for being so nice. The letter annoys Fowler because of Pyle's arrogant confidence that Phuong will leave Fowler to marry him. Meanwhile, Fowler's editor wants him to transfer back to England.
Pyle comes to Fowler's residence and they ask Phuong to choose between them. She chooses Fowler, unaware that he is pending a transfer. Fowler writes to his wife to ask for a divorce in front of Phuong.
Fowler and Pyle meet again in a war zone. They end up in a guard tower where they discuss topics ranging from sexual experiences to religion. Their presence endangers the local guards by attracting an attack by the Viet Minh. These indigenous auxiliaries simply want to live their lives, but they are doomed by their contact with foreign intrigue. Pyle saves Fowler's life as they escape. Fowler goes back to Saigon, where he lies to Phuong that his wife will divorce him. Pyle exposes the lie and Phuong must choose between him and Fowler. Like a small country caught between imperial rivals, Phuong considers her own interests realistically and without sentiment. She moves in with Pyle. After receiving a letter from Fowler, his editor decides that he can stay in Indo-China for another year. Fowler goes into the midst of the battlefield to witness events.
When Fowler returns to Saigon, he goes to Pyle's office to confront him, but Pyle is out. Pyle comes over later for drinks and they talk about his pending marriage to Phuong. Later that week, a car bomb is detonated and many innocent civilians are killed. Fowler realizes that Pyle was involved, having allied himself with General Thé, a renegade commander supposed to be the "Third Force" described in Harding's book. Pyle thus brings disaster upon innocents, all the while certain he is bringing a third way to Vietnam. Fowler is emotionally conflicted about this discovery, but ultimately decides to aid in the assassination of Pyle. Though the police suspect that Fowler is involved, they cannot prove anything. Phuong goes back to Fowler as if nothing had ever happened. In the last chapter, Fowler receives a telegram from his wife in which she states that she has changed her mind and will begin divorce proceedings. The novel ends with Fowler thinking about his first meeting with Phuong, and the death of Pyle.