Wallace Ritchie (Bill Murray) flies from Des Moines, Iowa, to London, United Kingdom, to spend his birthday with his brother, James (Peter Gallagher). James is not expecting the visit and is hosting a business dinner that night; to keep Wallace entertained, he sets him up with an interactive improv theatre business, the “Theatre of Life”, which promises to treat the participant as a character in a crime drama. Before the night begins, James hands Wallace a pair of Ambassador cigars, promising to “fire them up” before midnight in celebration of Wally’s birthday. Wallace answers a phone call intended for a hitman at the same payphone that the Theatre of Life uses for its act.
The contact, Sir Roger Daggenhurst (Richard Wilson), mistakes Wallace for Spencer, the hitman he has hired and Wallace assumes the identity. The real Spencer (Terry O’Neill) picks up the phone call meant for Wallace and murders one of the actors, prompting a police investigation. Daggenhurst, his assistant Hawkins (Simon Chandler), British Defense Minister Gilbert Embleton (John Standing), and Russian intelligence agent Sergei (Nicholas Woodeson) plan to detonate an explosive device (hidden in a Matryoshka doll) during a dinner between British and Russian dignitaries, in order to rekindle the Cold War and replace their aging technology.
Still believing he’s acting with the Theatre of Life, Wally meets Lori (Joanne Whalley), Embleton’s call-girl. Lori plans to blackmail Embleton for a substantial amount of money using letters that detail the plot. Spencer was hired to eliminate her and destroy the letters. Wallace scares off Embleton when he arrives to look for them and drives off Spencer. Fearing their plot will be revealed, Daggenhurst hires two more hitmen, while Sergei hires now-inactive spy Boris “The Butcher” Blavasky (Alfred Molina), to eliminate “Spencer”. Boris succeeds in killing the real Spencer, but Wallace and Lori return, retrieving the letters.
Using Spencer’s communicator, Wallace mentions lighting up some “big Ambassadors, at 11:59,” referring to James’ cigars. Thinking the words refer to the assassination plot, both sides believe he is an American spy who has caught on to their scheme. Daggenhurst offers Wallace and Lori 3 million British pounds in return for the letters, to be exchanged at the same hotel where the dinner is taking place. This is a ruse to capture and kill them both. All the while Wallace gets close to his “co-star” Lori, who confesses she’d love to study acting once they’re paid.
Wallace contacts James and tells him to meet him at the hotel – soon after, James sees an evening news report that Wallace has murdered an actor and police are searching for him, prompting James to abandon the business dinner. Wallace and Lori are caught and held captive. Boris opts for torture by Dr Ludmilla Kropotkin (Geraldine James), but Wallace and Lori separate and escape before she arrives. James is captured and sent to be tortured by Dr Kropotkin. Wallace evades the hitmen and finds himself part of a group of Russian folk dancers performing for the ambassadors. During the routine, he sees the Matryoshka doll bomb, unwittingly disarms it seconds before it goes off, blocks a poison dart from Boris with it, and steals the show with his improvised dancing.
Realizing their plot has failed when the bomb fails to go off, Sergei and Daggenhurst bring out two bags containing the promised £3 million for Wallace and Lori and release James, who is exhausted but otherwise fine after his torture session. Boris congratulates Wallace for his impressive covert skills and gives him a souvenir pistol, telling Wallace he will continue his butcher shop business. Sergei and Daggenhurst attempt to escape with half the money and discover Wallace’s doll, which they believe is only a normal one he picked out for himself. They are proven wrong when they realign the doll, reactivating the bomb and blowing them up, just as Wallace and Lori share a kiss.
Some time later, on an exotic beach, Wally unwittingly incapacitates a spy, passing a test by an unknown American espionage group. Believing he is capable of being a top agent, they offer him a position on “the team”. Thinking that they wish to make him a movie star, Wallace accepts their offer.