An airship carrying Sheeta, a young orphan girl who has been abducted by government agent Muska, is attacked by Captain Dola and her air pirate sons who are in search of Sheeta’s small blue crystal pendant. In the resulting struggle, Sheeta falls from the airship but her descent is slowed by a mysterious power within the amulet. She safely lands in a small mining town where she is discovered by a brave young orphan boy named Pazu, who takes her into his home to recover. Pazu tells her of a mysterious floating island named Laputa which is visible in a picture taken by his father. Later, they are pursued by Dola’s pirates, and then by Muska’s soldiers. Eventually, the two fall into an abandoned mine, where they encounter the local eccentric Uncle Pomme, who informs them that Sheeta’s amulet is made of ‘volucite’ crystal (‘Aetherium’ in the American release), a material used to keep Laputa and the other flying cities aloft.
Upon leaving the mines, Sheeta tells Pazu that her full name is ‘Lucita Toel Ul Laputa’. They are then captured by Muska and taken to the fortress of Tedis, where Pazu is imprisoned in a dungeon tower while Sheeta is imprisoned in a more lavish room. Muska shows Sheeta a dormant Laputan robot and reveals his knowledge of her secret name, which he interprets to be that of the Laputan royal line and Sheeta cries. Muska then threatens Pazu’s life to obtain Sheeta’s cooperation. For his own safety, Sheeta orders Pazu to leave and Muska offers him money to leave and forget about Laputa and Sheeta starts crying.
A distraught Pazu returns home, where he is ambushed by Dola and her sons. After hearing Pazu out, they prepare to intercept and capture the crystal, allowing Pazu to join them. As preparations proceed, Sheeta recites an apotropaic verse and unexpectedly activates the amulet and the robot, which follows Sheeta, destroying the fortress along the way until it is overcome by the military’s airship Goliath. Pazu arrives and rescues Sheeta, but Muska obtains the amulet. The pirates, accompanied by Pazu and Sheeta, return to their airship, Tiger Moth. They pursue the Goliath, which is following directions indicated by Sheeta’s amulet to locate Laputa. Dola puts Pazu to work with her husband in the engine room, while Sheeta becomes the ship’s cook. That night, joining Pazu on lookout duty, Sheeta reveals that her grandmother taught her many spells as a child, including the Spell of Destruction.
During an encounter with the Goliath, Dola tells Pazu and Sheeta how to turn the lookout into a kite, allowing them a higher view of their surroundings. The Tiger Moth soon approaches a hurricane, in which Pazu spots a swirl of clouds. Recognizing the clouds from his father’s picture, he tells Dola they have found Laputa and insists they must head toward the eye of the storm. However, the Goliath appears and opens fire on the Tiger Moth, sending it crashing down in flames. A gunshot severs the cable connecting the lookout kite to the ship, sending Pazu and Sheeta drifting off into the clouds. They land on Laputa, only to find the city ruined and overgrown.
Dola’s pirates are captured and Muska’s soldiers plunder the city’s treasures. Upon gaining entrance to the city’s central sphere, a vast repository for all of Laputa’s scientific knowledge, Muska captures Sheeta and his agents open fire upon Pazu, who escapes and frees the pirates. In the center of Laputa, which contains the immense ‘volucite’ crystal keeping the city aloft, Muska identifies himself as “Romuska Palo Ul Laputa”, another member of Laputa’s royal line, and uses Sheeta’s crystal to access the advanced Laputan technology. He betrays his own soldiers and destroys the Goliath by unleashing Laputa’s weapon of mass destruction. During the mayhem, the horrified Sheeta retrieves the crystal amulet and flees, but Muska pursues her. Hearing Pazu’s voice, Sheeta gives the amulet to him through a gap in the wall and is cornered by Muska in Laputa’s throne room.
During her confrontation with Muska, Sheeta explains that the people of Laputa left the castle because they realized that man was meant to live on earth and not in the sky. Muska refuses her arguments, shoots off her braids and threatens to kill her unless the crystal amulet is given to him. Pazu requests to be allowed to talk with Sheeta; Muska grants them one minute (three in the original Japanese version). At his request, Sheeta tells Pazu the Spell of Destruction; and they both recite the spell, causing the castle to disintegrate and Muska to fall to his death. After surviving the collapse, Pazu and Sheeta reunite with Dola and her pirates and leave Laputa behind. When they part with the pirates, Pazu flies Sheeta home as he had promised her, to start a new life together.
During the end credits, the remnants of Laputa float in orbit, maintained by the volucite crystal embedded in the roots of the central tree.