Sonny Malone attempts to make a living as a freelance artist but fails, and he returns to his old job of painting album cover reproductions at AirFlo Records. He rips up one of his failed freelance drawings and throws it into the wind, and it hits a mural of the Nine Muses of Olympus and brings them to life. The sisters fly up into the sky, but one of them, Terpsichore, returns to Earth.
Terpsichore proceeds to roller skate through town, and collides with Sonny, leading her to kiss him before skating away. Later, Sonny is tasked with painting the album cover for a group called The Nine Sisters, which shows Terpsichore standing in front of an abandoned art deco auditorium. The cameraman reveals that the woman was not supposed to be on the cover, but suddenly appeared in a few of the shots. Sonny goes to the auditorium and finds Terpsichore, who introduces herself as Kira. The two of them fall in love, though Kira refuses to tell Sonny anything about herself.
Sonny meets and befriends Danny McGuire, a has-been big band orchestra leader turned construction mogul. Danny once had a muse in the 1940’s who looked significantly like Kira. Kira encourages Sonny and Danny to open a nightclub at the auditorium, and the two begin working on this project as partners. However, Kira eventually confesses to Sonny that she is a Muse and cannot stay in love with him. Sonny gets upset, and Kira leaves Earth. Danny tells Sonny to keep pursuing Kira, having discovered that Kira was once his Muse and encouraging Sonny not to give up on his ambitions like he did after Kira left him. Sonny manages to enter Kira’s home, a forbidden place called Xanadu, by roller skating into the Muses’ mural.
Inside the realm of the gods, Kira’s father Zeus denies Sonny’s plea to let Kira come back to Earth, and despite Kira’s mother Mnemosyne interceding for Sonny and Kira, Zeus ultimately sends Sonny back to Earth. Kira then professes her feelings for Sonny, and her parents decide to let her go back to him for “a moment, or maybe forever.” Kira and the Muses perform at the grand opening of Sonny and Danny’s nightclub Xanadu before returning back to their realm. Sonny is saddened by their departure, but upon seeing a waitress who looks exactly like Kira, he stops her and asks to talk.