In the Valley of Peace, a land in Ancient China inhabited by anthropomorphic animals, a giant panda named Po helps his goose father Mr. Ping run their noodle restaurant, but dreams of fighting alongside the Furious Five – Tigress, Monkey, Crane, Viper and Mantis – a group of kung fu masters who live in the Jade Palace, where they are trained by Master Shifu, a cranky red panda. One day, the wise tortoise, Master Oogway, the founder of kung fu, and the Valley's spiritual leader, predicts that Shifu's former protégé, the snow-leopard Tai Lung, will escape from prison and attack the Valley to obtain the Dragon Scroll, a legendary artifact said to grant limitless power to its reader, which he had previously been denied. Panicked, Shifu sends his goose assistant, Zeng to increase the security at Chorh-Gom Prison, where Tai Lung is held.
Shifu holds a tournament for the Five so that Oogway can identify the Dragon Warrior, the prophesied hero worthy of reading the Scroll, and Po arrives too late to enter the arena. Desperate to see his idols, he accidentally launches himself into the middle of the tournament off a chair propelled by fireworks. With the townsfolk believing Po descended from the sky in a fireball, Oogway proclaims Po the Dragon Warrior, much to Po's and the Masters' shock. Shifu believes Oogway's decision to be an accident, and the Five dismiss him, so Po considers quitting. However, after receiving encouragement from Oogway, he endures a frustrated Shifu's harsh training and gradually befriends the Five with his resilience, culinary skill and good humor. During this time, Tigress informs him that Shifu's distant behavior stems from his shame over Tai Lung's betrayal because of being denied the dragon scroll (as Oogway sensed darkness in his heart), having raised him from infancy.
At Chorh-Gom Prison, Zeng's warnings are ignored; Tai Lung easily escapes and subdues his guards before sending Zeng back. Shifu informs Oogway, who makes Shifu promise to believe in Po as the Dragon Warrior, before hiring Shifu as his successor as the Valley's leader and ascending into the Spirit Realm in a stream of peach blossoms. Shifu informs Po and the Five of Tai Lung's escape and Oogway's passing, and tells Po he is the only one who can stop him. Horrified by the bad news about Oogway's death, Po attempts to run away, but Shifu stops him. When Shifu asks Po why he chose to stay, Po tells him that he hated who he was, and he felt that despite Shifu's harsh treatment, he still believed Shifu could change him. Po then makes Shifu admit that he does not know how to train him to be the Dragon Warrior. Tigress overhears this and leads the Five in a secret attempt to stop Tai Lung.
Meanwhile, Shifu discovers that Po is capable of impressive physical feats when motivated by food, and successfully trains Po by incorporating these feats into an innovative style of Kung Fu. The Furious Five fight Tai Lung, but he ultimately defeats them with his nerve-strike technique, leaving only Crane who carries the rest back to the valley, as a warning. On returning, Shifu decides that Po is ready to receive the Dragon Scroll. When Po opens it, he discovers that the scroll is nothing but a blank reflective surface. Believing the Scroll to have no power, Shifu has Po and the Five evacuate the inhabitants of the Valley while he faces Tai Lung alone to help everyone else escape. Trying to console a distraught Po, Mr. Ping reveals that his "secret ingredient soup" has no secret ingredient at all, explaining that things can become special with belief. Realizing that this is the message of the Dragon Scroll, Po rushes back to help Shifu.
At the Jade Palace, Tai Lung brutally defeats Shifu, but he discovers that the Scroll is missing. Po arrives with the Scroll, saving Shifu's life and prompting them to fight. Po proves to be a formidable opponent, frustrating Tai Lung with his confusing fighting techniques. Tai Lung eventually obtains the Scroll, but does not comprehend its blank surface. Tai Lung tries to take his frustrations out on Po with his nerve-strike technique. However, Tai Lung discovers that Po is immune to this. Po overpowers Tai Lung and sends him to the Spirit Realm using the legendary Wuxi Finger Hold technique, which he taught himself. Po is honored by the Valley, earns the respect of the Five, and relaxes with a recovered Shifu.