In what appears to be a park, Francis sits on a bench with an older man and complains that spirits have driven him away from his family and home. When a dazed woman passes them, Francis explains she is his "fiancée" Jane and that they have suffered a great ordeal. Most of the rest of the film is a flashback of Francis' story, which takes place in Holstenwall, a shadowy village of twisted buildings and spiraling streets.

Francis and his friend Alan, who are good-naturedly competing for Jane's affections, plan to visit the town fair. Meanwhile, a mysterious man named Dr. Caligari seeks a permit from the rude town clerk to present a spectacle at the fair, which features Cesare, a somnambulist. The clerk mocks and berates Caligari, but ultimately approves the permit. That night, the clerk is stabbed to death in his bed.

The next morning, Francis and Alan visit Caligari's sideshow attraction, where he opens a coffin-like box to reveal the sleeping Cesare. On Caligari's order, Cesare awakens and answers questions from the audience. Despite Francis' protests, Alan asks, "How long shall I live?" To Alan's horror, Cesare answers, "The time is short. You die at dawn!" Later that night, a figure breaks into Alan's home and stabs him to death in his bed. A grief-stricken Francis investigates Alan's murder with help from Jane and her father, Dr. Olsen, who obtains police authorization to investigate the somnambulist. That night, the police apprehend a criminal in possession of a knife who is caught attempting to murder an elderly woman. When questioned by Francis and Dr. Olsen, the criminal confesses he tried to kill the elderly woman, but denies any part in the two previous deaths; he was merely taking advantage of the situation to divert blame away from himself.

At night, Francis spies on Caligari and observes what appears to be Cesare sleeping in his box. However, the real Cesare sneaks into Jane's home as she sleeps. He raises a knife to stab her, but instead abducts her after a struggle, dragging her through the window onto the street. Chased by an angry mob, Cesare eventually drops Jane and flees; he soon collapses and dies of exhaustion. Francis confirms that the criminal who confessed to the elderly woman's murder is still locked away and could not have been Jane's attacker. Francis and the police investigate Caligari's sideshow and discover that the "Cesare" sleeping in the box is only a dummy. Caligari escapes in the confusion. Francis follows him and sees Caligari go into an insane asylum.

Upon further investigation, Francis is shocked to learn that Caligari is the asylum's director. With help from the asylum staff, Francis studies the director's records and diary while the director is sleeping. The writings reveal his obsession with the story of an 18th-century mystic named Caligari, who used a somnambulist named Cesare to commit murders in northern Italian towns. The director, attempting to understand the earlier Caligari, experiments on a somnambulist admitted to the asylum, who becomes his Cesare. The asylum director screams, "I must become Caligari!" Francis and the doctors call the police to Caligari's office, where they show him Cesare's corpse. Caligari then attacks one of the staff. He is subdued, restrained in a straitjacket, and becomes an inmate in his own asylum.

The narrative returns to the present, where Francis concludes his story. In a twist ending, Francis is depicted as an asylum inmate. Jane and Cesare are patients as well; Jane believes that she is a queen, while Cesare is not a somnambulist but awake, quiet, and not visibly dangerous. The man Francis refers to as "Dr. Caligari" is the asylum director. Francis attacks him and is restrained in a straitjacket, then placed in the same cell where Caligari was confined in Francis's story. The asylum director announces, now that he understands Francis's delusion, that he is confident he can cure him.