In 1891 London, Sherlock Holmes (Robert Downey, Jr.) and Dr. John Watson (Jude Law) race to prevent a human sacrifice ritual conducted by Lord Blackwood (Mark Strong). Holmes and Watson stop the sacrifice just in time and neutralize Lord Blackwood while Holmes saves Watson from a glass shard Blackwood used to kill his enemies that he barely sees until the last second, after which the police, led by Inspector Lestrade (Eddie Marsan), arrive and arrest him. Blackwood's execution occurs three months later, during which Holmes has become bored without a new case. Watson prepares to leave 221B Baker Street to establish his own business, and he intends to marry Mary Morstan (Kelly Reilly). Blackwood requests Holmes' presence on the day of his execution, and warns him that three more deaths will occur after his execution that will change the very nature of their world. Blackwood is executed by hanging, and declared dead by Dr. Watson himself.
Holmes is re-acquainted with Irene Adler (Rachel McAdams), a world-class criminal Holmes is smitten with. She offers him a sum of money to pursue a case of a missing red-haired midget by the name of Reordan. Holmes disguises himself to find the identity of Adler's employer, but can only surmise that he is a professor.
Three days after Blackwood's execution, his tomb is found shattered, from the inside out, and an eyewitness reports seeing Blackwood walking away. Holmes, Watson, and Lestrade find Blackwood's coffin contains the body of the red-haired midget. Holmes follows clues from a pocket watch on the body to the midget's home, where they discover several chemistry experiments. They avoid capture by three thugs that have arrived to destroy the evidence in the home. An elaborate chase ensues, with Holmes and Watson narrowly escaping death several times, and ending with a steamship that was being built in a naval yard sinking in the river Thames; the pair are then arrested for property damage.
Watson is soon released on bail by Miss Morstan, while Holmes is left in jail and later taken to the Temple of the Four Orders, an occult-dabbling secret society. Their leaders; Sir Thomas (James Fox) and Lord Coward (Hans Matheson), reveal Blackwood was a former member, and plead for Holmes to help stop him. Holmes declines their generous offers of reward but continues to pursue the case on his own terms.
As Holmes and Watson investigate, two senior members of the order are killed by Blackwood, through apparently magical means. One of them, Sir Thomas, is drowned in his bathtub and there is no trace of anybody else being present in the room at the time of his death; while the other bursts into flames when he attempts to shoot Blackwood during an Order meeting. Blackwood, with the assistance of Lord Coward who is revealed to have been his long time ally, then assumes control of the order, intending to use the Order's power to push for England to retake the United States after their civil war has weakened their defences. Blackwood orders Coward to issue a warrant for Holmes' arrest.
Holmes and Watson follow clues to an industrial slaughterhouse, where they are taunted by Blackwood and forced to rescue Adler from a deadly conveyor belt trap. Watson chases after Blackwood but is caught by a tripwire, setting off an explosion; Watson is able to warn Holmes and Adler to safety but is badly injured himself in the explosion. Holmes learns he is wanted by the police and goes into hiding, and reflects on the clues he has collected. He comes to realize that Blackwood is attempting to cast a spell based on the sphinx, with the three murdered tied to three of the mythical creature's animal constituents: man, ox, and eagle. Holmes deduces the fourth symbol the lion, represents the British Parliament. Holmes allows Lestrade to capture and bring him to the Home Secretary. Overconfident, Lord Coward reveals Blackwood's plan for wiping out all the Lords but save those loyal followers of his. Holmes escapes, diving into the river Thames, and is rescued by a waiting boat with Watson and Adler in it.
The three enter the sewers beneath Parliament and discover a complex machine, based on the midget's experiments, with a radio-controller trigger to release a cyanide derivative into the Parliament chambers. The three fight off Blackwood's men and dislodge the cyanide cylinders from the machine. Adler grabs the cylinders and races away, followed by Holmes.
Meanwhile, Blackwood and Coward realize their plan has failed and attempt to escape. Blackwood manages to get away but Coward is unable to leave. Holmes confronts Adler at the top of the Tower Bridge, still under construction since she has nowhere to run, but Blackwood arrival knocks Adler to a lower platform, where she falls unconscious. Holmes tricks Blackwood into becoming entangled in the ropes and chains, and Blackwood is left hanging precariously over the Thames while Holmes recounts that all of Blackwood's "mystical" acts were simply applications of science and trickery. Holmes intends for Blackwood to stand trial and be appropriately executed but a loose beam falls off the rafter supports, causing Blackwood to plummet off the bridge and be hanged by the chains.
Holmes helps Adler recover, though he handcuffs her. She explains that the mysterious caped man in the carriage is Professor Moriarty. Adler warns Holmes that Moriarty "is just as brilliant as he is, and infinitely more devious". Holmes drops the key to the cuffs in Adler's shirt and leaves her, returning to Watson. The police arrive to report a dead officer found near Blackwood's device, and Holmes deduces that chasing Adler and fighting Blackwood was a diversion by Moriarty, who used the distraction to take a key component of Blackwood's remote control device from the machine. Holmes accepts the case.
