In 1962, Lensherr is tracking down Schmidt while Xavier is graduating from the University of Oxford with a thesis about mutation. In Las Vegas, Central Intelligence Agency officer Moira MacTaggert follows U.S. Army Colonel Hendry into the Hellfire Club, where she sees Schmidt (now known as Sebastian Shaw), with mutant telepath Emma Frost, cyclone-producing Riptide and teleporter Azazel. Threatened by Shaw and teleported by Azazel to the Joint War Room, Hendry advocates the deployment of nuclear missiles in Turkey. Shaw, an energy-absorbing mutant, later kills Hendry.
MacTaggert, seeking Xavier's advice on mutation, takes him and Raven to the CIA, where they convince Director John McCone that mutants exist and Shaw is a threat. Another CIA executive sponsors the mutants and invites them to the secret "Division X" facility. MacTaggert and Xavier find Shaw as Lensherr is attacking him, rescuing Lensherr from drowning as Shaw escapes. Xavier brings Lensherr to Division X, where they meet young scientist Hank McCoy, a mutant with prehensile feet, who believes Raven's DNA may provide a "cure" for their appearance. Xavier uses McCoy's mutant-locating device Cerebro to seek recruits against Shaw. Xavier and Lensherr recruit stripper Angel Salvadore. Later, taxi driver Armando Muñoz, Army prisoner Alex Summers, and Sean Cassidy join, and code-name themselves Darwin, Havok, and Banshee, respectively. Raven dubs herself Mystique. Xavier and Lensherr also approach Wolverine, but he rudely declines.
When Frost meets with a Soviet general in the USSR, Xavier and Lensherr capture Frost and learn of Shaw's intentions to start World War III and trigger mutant ascendency. Meanwhile, Azazel, Riptide and Shaw attack Division X, killing everyone but the mutants, and invite them to join him. Angel accepts; when Havok and Darwin retaliate, Shaw absorbs Havok's energy blast and uses it to kill Darwin.
Xavier takes the mutants to his family mansion for training. In Moscow, Shaw compels the general to have the USSR install missiles in Cuba. Wearing a helmet that foils Xavier's telepathy, Shaw shadows the Soviet fleet in a submarine to ensure the missiles break a blockade the US has issued.
Raven, thinking McCoy likes her in her natural form, tells him not to use the cure. When she later attempts to seduce Lensherr by taking the forms of various women, Lensherr instead tells her that she is beautiful in her blue mutant form. McCoy uses the cure on himself but it backfires, giving him blue fur and leonine aspects. With McCoy piloting, the mutants and MacTaggert take a jet to the blockade line, where Lensherr uses his magnetic power to lift Shaw's submarine from the water and deposit it on land. During the ensuing battle, Lensherr seizes Shaw's helmet, allowing Xavier to immobilize Shaw. Lensherr tells Shaw he shares Shaw's exclusivist view of mutants but, to avenge his mother, kills Shaw—over Xavier's objections—by forcing the Nazi coin of his youth through Shaw's brain.
Fearing the mutants, both fleets fire their missiles at them, which Lensherr turns back in mid-flight. MacTaggert tries to stop Lensherr by shooting him but he deflects the bullets, one of which hits Xavier in the spine. Lensherr rushes to help Xavier and, distracted, allows the missiles to fall harmlessly into the ocean. Lensherr leaves with Angel, Riptide, Azazel, and Mystique. Later, a wheelchair-bound Xavier and his mutants are at the mansion, where he intends to open a school. MacTaggert promises never to reveal his location and they kiss; at a CIA debriefing later, she says she has no clear memory of recent events. Elsewhere Lensherr, now calling himself "Magneto", frees Frost from confinement.