One night an airship travels though the clouds. On board are Sheeta, owner of the blue levitation stone, and Muska, the government agent who abducted her. Suddenly and without warning, Dola and her gang of air pirates attack the airship. Like Muska, they too want Sheeta and her stone. The pirates invade the ship, and during the ensuing chaos, Sheeta manages to knock Muska unconscious. The pirates break into Sheeta's room, and she tries  to hide clinging to the outside of the ship. However, she loses her grip and falls into the night sky.

As the unconscious Sheeta hurtles toward the ground, the levitation stone emits a mysterious light slowing Sheeta's descent. From a small mining town (Slag's Ravine), a young boy named Pazu sees the light of the stone descending from the sky and runs to investigate. Upon reaching the mineshaft, he reaches out to catch the falling girl. To his amazement, she appears weightless. That is, until the stone stops glowing... Pazu decides to take her back to his home.

The next morning, Sheeta awakens to the sound of Pazu blowing his trumpet on the roof. After introductions to each other, Pazu asks to see the stone. Pazu then tries to levitate himself with it, only to crash through the roof in the attempt. Later, Sheeta notices a picture of the legendary kingdom of Laputa on a wall in Pazu's home. The picture was taken by Pazu's father, and Pazu explains how his father saw the floating island among the thick, stormy clouds during an airship trip. Pazu's father returned, but no one believed his discovery, and he died in misery. Now, Pazu is building a huge onrithopter so that he can rediscover Laputa.

It's not very long though, before the pirates track Sheeta down to Pazu's house. A street brawl starts between the townspeople and the pirates while Pazu and Sheeta sneak away and board a small train. Dola, after gathering up her men, chases after them. This has not gone unnoticed. One of Muska's agents spots Sheeta and soon, with a large military force, they too are chasing Pazu and Sheeta. As a result of this altercation, Pazu and Sheeta are forced off the tracks and seemingly fall to their doom. However, the levitation stone once again goes to work. Both the pirates and the military troops watch in awe as the two float gently downward.

The two descend into a mineshaft. At the bottom they meet Uncle Pom, an old eccentric miner. Pom explains that he came down here to see the rocks glowing in the dark. The rocks have the vein of the levitation stone, and he then shows what happens when they are exposed to air. Sheeta notices that her stone is glowing with the rest of the stones. She shows it to Uncle Pom who, in amazement, tells them that it is a crystal. Uncle Pom says that only the people of Laputa knew how to create such crystals, and in doing so were able to construct a huge floating island in the sky. Through this new knowledge Pazu and Sheeta are able to ascertain that Laputa truly does exist.

By nightfall, Pazu reaches his home. He is greeted by Dola and her pirates (actually her sons), who have taken over Pazu's home as a temporary base. Once they have tied up Pazu, Dola points out how naive he was to have misinterpreted Sheeta's actions. She also mentions that Muska probably won't let Sheeta live after he gets what he wants from her. Meanwhile, Sheeta, back in her room, sadly recites a saying that her grandmother taught her to make trouble go away. The stone, in response to Sheeta's words, starts to emit mysterious rays and, as a result, activates the robot soldier in the basement. Awakened from its dormant state, the robot begins to create havoc within the castle, as it attempts to locate Sheeta.

Back home, Pazu asks Dola if he can join her pirates so that he can save Sheeta. Dola agrees, and they leave for Tedis Fortress using the flapters. Back at the fortress, all attempts to stop the robot soldier have failed. The robot chases Sheeta to the top of a tower and tries to communicate with her. The stone, still shining, emits a light towards the sky, which Muska interprets as the location of Laputa. Muska then cuts the communication lines, preventing the General (Genearl Mouroa) from asking his personnels about the situation Suddenly one of the shots from the fortress' gun turrets hits the robot and disables it. The soldiers rush to the tower thinking that they are victorious. However, the robot reactivates. Now, in an almost crazed state, it begins to obliterate the entire fortress, firing at anything that looks hostile. Sheeta, shocked by the carnage it has caused, tries to stop the robot by covering its head. The robot moves Sheeta to a safer place, only to be destroyed by the airship Goliath. Pazu saves Sheeta from the burning tower as he passes over in Dola's flapter. The pirates make their escape easily, however the stone is now in possession of Muska, and is still emitting a beacon towards Laputa.

The pirates, accompanied by Pazu and Sheeta, make it back to their airship (Tiger Moth). Once there, Dola makes quick use of Pazu and Sheeta, giving them both jobs to do onboard the ship. They head east, in the direction Sheeta's stone was shining previously in the Fortress. Later, while Pazu is up on the top of the ship keeping watch, Sheeta goes up to talk to him. She tells Pazu that she actually doesn't want to go to Laputa, and that she feels sorry about the robot. She is scary of the power of her levitation stone, and wishes that it didn't exist at all. Pazu points out to her, that with the rapid advances in aviation technology, someone will sooner or later find Laputa and that they can't let someone like Muska find it first. Sheeta also tells him about the different charms her grandmother taught her, including the "Doom" charm, which she is never supposed to use.

Then, Pazu sees a silhouette of the Goliath in the clouds beneath the Tiger Moth. He wakes the crew, and the Tiger Moth dives into the clouds to avoid confrontation. Pazu and Sheeta take off in a glider to help guide the Tiger Moth towards Laputa. Pazu tells Dola to head into the big storm ahead, since that was what his father did before. There the Goliath finds them and attacks. The Tiger Moth is hit, and the glider is disconnected from the ship. Pazu and Sheeta plummet towards the ground. Suddenly, Pazu, while trying to get the glider under control, sees the image of his father. Guided by the lightenings, the glider make it through the storm and emerge into clear sky.

They arrive at Laputa, the legendary floating kingdom. However, there is no one living there. Pazu and Sheeta are greeted by a solitary gardener robot who takes care of the lush gardens of the upper portion of Laputa. The robot leads the children to a grave plaque in the central gardens, and offers Sheeta a flower. Then, the sound of an explosion is heard below. It is the government troops, raiding the treasure hall of the castle. They see that Dola and the pirates have been captured, and try to reach them, but Muska and his men see them. Soon Sheeta is captured and taken by Muska to the inner chambers of the castle. Meanwhile, Pazu succeeds in freeing the pirates. Dola gives him a canon and two shells so he can rescue Sheeta.

Muska reaches the control center of Laputa, which contains the giant levitation stone that keeps Laputa aloft. Sheeta, wondering how Muska knows so much about Laputa, asks who he really is. Muska reveals himself as also being a descendant of Laputa. Now in control of the castle, Muska tells General Mouroa and his men to come to the observation room so that he can demonstrate the awesome power of the castle. The general thanks Muska for his services and tries to kill him. Muska, prepared for this, opens up the floor of the observatory and sends the general and his men to their deaths. He then unleashes hundreds of robot soldiers onto the remaining troops. The troopers quickly scramble back to the Goliath in fear, but the robots destroy the giant airship. Sheeta is able to catch Muska off guard while he is enjoying the destruction of Goliath and manages to grab the stone away from him. Muska, unable to control Laputa without the stone, chases after her.