In the slum neighborhood of Five Points, Manhattan, in 1846, two gangs have engaged in a final battle (or “challenge”) in Paradise Square over “who holds sway over the Five Points”; these two factions participating in this event are the nativist, English Protestant Natives led by William “Bill the Butcher” Cutting, and a group of Irish Catholic immigrants, the “Dead Rabbits”, led by “Priest” Vallon. At the end of this battle, Bill kills Vallon and declares the Dead Rabbits outlawed. Having witnessed this, Vallon’s young son hides the knife that killed his father and is taken to an orphanage on Blackwell’s Island.
Sixteen years later, in 1862, Vallon’s son, using the alias of Amsterdam, returns to the Five Points seeking revenge and retrieves the knife. An old acquaintance, Johnny Sirocco, familiarizes him with the local clans of gangs and thieves, all of whom pay tribute to Bill, who controls the neighborhood. Amsterdam is finally introduced to Bill, but keeps his past a secret, seeking to be recruited. He learns that many of his father’s former loyalists are now in Bill’s employ. Each year, Bill celebrates the anniversary of his victory over the Dead Rabbits; Amsterdam plans to murder him secretly during this celebration.
Amsterdam becomes attracted to pickpocket and grifter Jenny Everdeane, with whom Johnny is infatuated. Amsterdam gains Bill’s confidence and Bill becomes his mentor, involving him in the dealings of corrupt Tammany Hall politician William M. Tweed. Amsterdam saves Bill from an assassination attempt, and is tormented by the thought that he may have done so out of honest devotion.
On the evening of the anniversary, Johnny, in a fit of jealousy over Jenny’s affections for Amsterdam, reveals Amsterdam’s true identity and intentions to Bill. Bill baits Amsterdam with a knife throwing act involving Jenny. As Bill toasts Priest Vallon, Amsterdam throws his knife, but Bill deflects it and wounds Amsterdam with a counter throw. Bill then beats him and burns his cheek with a hot blade. Going into hiding, Jenny nurses Amsterdam back to health and implores him to escape with her to San Francisco.
Amsterdam, however, returns to the Five Points seeking vengeance, and announces his return by hanging a dead rabbit in Paradise Square. Bill sends corrupt policeman Mulraney to investigate, but Amsterdam kills him and hangs his body in the square. In retaliation, Bill has Johnny beaten and run through with a pike, leaving it to Amsterdam to end his suffering. The incident garners newspaper coverage, and Amsterdam presents Tweed with a plan to defeat Bill’s influence: Tweed will back the candidacy of Monk McGinn for sheriff and Amsterdam will secure the Irish vote for Tammany. Monk wins in a landslide (the election had been rigged by the Dead Rabbits), and a humiliated Bill murders him. McGinn’s death prompts an angry Amsterdam to challenge Bill to a gang battle in Paradise Square for order, which Bill accepts.
Citywide draft riots break out just as the gangs are preparing to fight, and Union Army soldiers are deployed to control the rioters. As the rival gangs face off, cannon fire from naval ships is fired directly into Paradise Square, interrupting their battle shortly before it begins. Between the cannons, soldiers, and rioters, many of the gang members are killed. Bill and Amsterdam face off against one another until Bill gets wounded by a piece of shrapnel. Amsterdam then uses his father’s knife to stab Bill, killing him and ending his reign at last. Afterward, Amsterdam and Jenny leave New York together to start a new life in San Francisco. Before they leave, Amsterdam buries Bill in a cemetery in Brooklyn next to his father. As Amsterdam and Jenny leave the cemetery, the final scene of the film shows the skyline changing in a time-lapse over the next hundred and forty years as modern Manhattan is built, from the Brooklyn Bridge to the World Trade Center, and the cemetery becomes overgrown and forgotten.