A dark-haired woman is the sole survivor of a car crash on Mulholland Drive, a winding road high in the Hollywood Hills. Injured and dazed, she makes her way down into Los Angeles by foot and sneaks into an apartment. Later that morning, an aspiring actress named Betty Elms arrives at the apartment, which is normally occupied by her Aunt Ruth. Betty is startled to find the woman, who has amnesia and calls herself "Rita" after seeing a poster for the film Gilda starring Rita Hayworth. To help the woman remember her identity, Betty looks in Rita's purse, where she finds a large amount of money and an unusual blue key.

At a diner called Winkie's, a man tells another about a nightmare in which he dreamt of encountering a horrific figure behind the diner. When they investigate, the figure appears, causing the man who had the nightmare to collapse in fright. Elsewhere, director Adam Kesher has his film commandeered by mobsters, who insist he cast an unknown actress named Camilla Rhodes as the lead. Adam refuses and returns home to find his wife Lorraine cheating on him. When the mobsters withdraw his line of credit, Adam arranges to meet a mysterious cowboy, who cryptically urges him to cast Camilla for his own good. Meanwhile, a bungling hitman attempts to steal a book full of phone numbers and leaves three people dead.

While trying to learn more about Rita's accident, Betty and Rita go to Winkie's and are served by a waitress named Diane, which causes Rita to remember the name "Diane Selwyn". They find Diane Selwyn in the phone book and call her, but she does not answer. Betty goes to an audition, where her performance is highly praised. A casting agent takes her to a soundstage where a film called The Sylvia North Story, directed by Adam, is being cast. When Camilla Rhodes auditions with the song "I've Told Every Little Star", Adam capitulates to the mob by casting her. Betty locks eyes with Adam, but she flees before she can meet him, saying she is late to meet a friend. Betty and Rita go to Diane Selwyn's apartment, where a neighbor answers the door and tells them she has switched apartments with Diane. They go to the neighbor's apartment and break in when no one answers the door. In the bedroom, they find the body of a woman who has been dead for several days. Terrified, they return to Betty's apartment, where Rita disguises herself with a blonde wig. That night, she and Betty have sex.

At 2 a.m., Rita awakes suddenly, insisting they go right away to a theater called Club Silencio. There, the emcee explains in different languages that everything is an illusion; Rebekah Del Rio comes on stage and begins singing the Roy Orbison song "Crying" in Spanish, then collapses, unconscious, while her vocals continue in playback. Betty finds a blue box in her purse that matches Rita's key. Upon returning to the apartment, Rita retrieves the key and finds that Betty has disappeared. Rita unlocks the box, and it falls to the floor. Aunt Ruth enters the room to find nobody.

Diane Selwyn wakes up in her bed in the apartment Betty and Rita investigated, where her neighbor informs her that two police officers have been looking for her. She looks exactly like Betty, but is a struggling actress driven into a deep depression by her failed affair with Camilla Rhodes, who is a successful actress and looks exactly like Rita. At Camilla's invitation, Diane attends a party at Adam's house on Mulholland Drive. At dinner, Diane states she came to Hollywood from Canada after her aunt, who worked in the movies, died and left her some money, and that she met Camilla at an audition for The Sylvia North Story. Another woman, who looks like the "Camilla Rhodes" who auditioned for Adam, kisses Camilla, and they turn and look at Diane. Adam and Camilla prepare to announce their engagement, but they dissolve into laughter and kiss while Diane watches, teary-eyed.

Later, Diane meets the hitman at Winkie's and hires him to kill Camilla. He tells her she will find a blue key when the job is completed. The figure from the man's dream is revealed to have the matching blue box. In her apartment, Diane looks at the blue key on her coffee table while someone repeatedly knocks on the door. Distraught, she is terrorized by hallucinations and runs screaming to her bed, where she shoots herself. A blue-haired woman at the theater whispers "Silencio".