In 1184, Balian, a French blacksmith, is haunted by his wife's recent suicide. A group of Crusaders arrives in his village; one of them introduces himself as Balian's father, Baron Godfrey of Ibelin. Godfrey asks Balian to return with him to Jerusalem. Balian refuses and the Crusaders leave. The town priest, Balian's half-brother, reveals that he ordered Balian's wife beheaded before burial, a customary practice for people who commit suicide. Balian notices his brother wearing the cross that his wife wore before she was to be buried. In a fit of rage, Balian kills his brother, retrieves the crucifix, and flees the village. Balian pursues his father in the hope of gaining forgiveness and redemption for himself and his wife in Jerusalem. After he reaches Godfrey, soldiers sent by the priest's Bishop arrive, ostensibly to arrest Balian. In reality, the priest's nephew intends to assassinate Balian and Godfrey so that his father, and eventually he, may inherit Godfrey's barony. Godfrey refuses to surrender Balian, and the nephew launches a sneak attack against Godfrey. The attack fails, and Godfrey kills his nephew but is struck by an arrow that breaks off in his body.
In Messina, Godfrey knights Balian and, before succumbing to his injuries, orders Balian to serve the King of Jerusalem and protect the helpless. During Balian's journey to Jerusalem his ship runs aground in a storm, leaving Balian and a horse as the only survivors. When Balian releases the horse from the wreckage it flees in panic. Following the horse, Balian is confronted by a Muslim cavalier and what appears to be the cavalier's servant. A fight over the horse follows and Balian reluctantly slays the cavalier when attacked but spares the servant, asking him to guide him to Jerusalem. Upon arriving, Balian gives the horse to the servant and releases him. The man tells Balian his slain master was an important knight amongst the Saracens; his deed will gain him fame and their respect.
Balian becomes acquainted with Jerusalem's political arena: the leper King Baldwin IV, Tiberias the Marshal of Jerusalem, the King's sister, Princess Sibylla, and her husband Guy de Lusignan, who supports the anti-Muslim activities of brutal factions like the Knights Templar. Guy intends to rule after Baldwin's death and seeks to provoke a war that will allow him to dispose of the Muslims and claim the Kingdom for the Christians.
Guy and his ally, Raynald of Châtillon, attack a Saracen caravan with the aid of the Templars. This triggers Saladin, leader of the Muslim forces to invade the Christian Kingdom. He advances first on Kerak, Raynald's castle, to punish him for his crime. The King and Tiberias send word to Balian, who arrives just in time to screen the villagers entering the castle from Saladin's cavalry, despite a request from Raynald to withdraw. Though outnumbered, Balian and his knights charge Saladin's cavalry, allowing the villagers time to flee. A fierce, but one-sided battle ensues in which Balian's surviving knights are captured. In the enemy camp, Balian encounters the servant he freed, Imad ad-Din, and learns he is actually Saladin's Chancellor. Imad ad-Din releases Balian to enter Kerak, in repayment of the debt he owes to Balian. Saladin arrives with his army to besiege Kerak, and King Baldwin IV approaches with his. They negotiate a Muslim retreat, and Baldwin swears to punish Raynald. Baldwin confronts Raynald, forcing him onto his knees. As Raynald grovels for mercy, Baldwin slaps him a few times and forces Raynald to kiss his diseased hand. The exertion associated with these events causes Baldwin to collapse, weakened beyond recovery. In his camp, Saladin assures his fanatical generals that he will reclaim Jerusalem, but only when he is confident of victory.
Baldwin asks Balian to marry Sibylla, knowing they have affection for each other, but Balian refuses because in order for the marriage to occur, Guy would have to be killed. After Baldwin dies, Sibylla succeeds her brother and names Guy King of Jerusalem. Guy releases Raynald, asking him to give him a war, which Raynald does by murdering Saladin's sister. When Saladin's emissary relays demands for the return of his sister's body, the heads of those responsible and the surrender of Jerusalem, Guy decapitates the emissary and sends his head back to Damascus. Guy sends three Templars to assassinate Balian, the most strident voice against a war, though Balian survives the assassination attempt.
In council, Guy and the Templars are finally free to make war. Despite sound advice, they march into the desert to fight Saladin, leaving Jerusalem unguarded except for Balian, Tiberias, their knights, a few remaining Crusader soldiers, and the townspeople. Saladin's army attacks the Crusaders, and in the ensuing battle the Crusaders are annihilated. Guy and Raynald are captured. Saladin executes Raynald and then marches on Jerusalem, sparing Guy as king only out of tradition. Tiberias and his men leave for Cyprus, believing Jerusalem is lost, but Balian and his knights remain to protect the villagers. Knowing they cannot defeat the Saracens, they hope to hold their enemies off long enough for the Saracens to offer terms. After a battle that lasts three days, with the Saracens repeatedly denied entrance to Jerusalem, a frustrated Saladin parleys with Balian. In the end, when Balian threatens to burn down the Muslim holy shrines, he relents and agrees to allowing all the inhabitants safe conduct to Christian lands.
In the marching column of citizens, Balian finds Sibylla, who has renounced her claim as Queen of Jerusalem and other cities. After Balian returns to his village in France, English knights ride through looking for Balian, defender of Jerusalem. Balian replies that he is merely the blacksmith, the man leading the knights identifies himself as King Richard the Lionheart, and they commence a new Crusade to retake Jerusalem. Richard rides off, Balian is joined by Sibylla, and passing by Balian's wife's grave, they ride toward a new life together.
An epilogue states that the Third Crusade ended in an uneasy truce between Richard and Saladin after three years of war, and concludes that "nearly a thousand years later, peace in the Holy Land still remains elusive".