In the Second Age of Middle-earth, the lords of Elves, Dwarves, and Men are given Rings of Power. Unbeknownst to them, the Dark Lord Sauron forges the One Ring in Mount Doom, instilling into it a great part of his power to dominate the other Rings and conquer Middle-earth. A final alliance of Men and Elves battles Sauron's forces in Mordor. Isildur of Gondor severs Sauron's finger and the Ring with it, thereby vanquishing Sauron and returning him to spirit form. With Sauron's first defeat, the Third Age of Middle-earth begins. The Ring's influence corrupts Isildur, who takes it for himself and is later killed by Orcs. The Ring is lost in a river for 2,500 years until it is found by Gollum, who owns it for over four and a half centuries. The Ring abandons Gollum and is subsequently found by a hobbit named Bilbo Baggins, who is unaware of its history.

Sixty years later, Bilbo celebrates his 111th birthday in the Shire, reuniting with his old friend, the wizard Gandalf the Grey. Bilbo departs the Shire for one last adventure and leaves his inheritance, including the Ring, to his nephew Frodo. Gandalf investigates the Ring, discovers its true nature, and learns that Gollum was captured and tortured by Sauron's Orcs, revealing two words during his interrogation: "Shire" and "Baggins". Gandalf returns and warns Frodo to leave the Shire.

As Frodo departs with his friend, gardener Samwise Gamgee, Gandalf rides to Isengard to meet with the wizard Saruman but discovers his betrayal and alliance with Sauron, who has dispatched his nine undead Nazgûl servants to find Frodo. Frodo and Sam are joined by fellow hobbits Merry and Pippin, and they evade the Nazgûl before arriving in Bree, where they are meant to meet Gandalf. However, Gandalf never arrives, having been taken prisoner by Saruman. The hobbits are then aided by a Ranger named Strider, who promises to escort them to Rivendell.

The Hobbits and Strider are ambushed by the Nazgûl on Weathertop, and their leader, the Witch-King, stabs Frodo with a Morgul blade. Arwen, an Elf and Strider's beloved, locates Strider and attempts to rescue Frodo by leading him to safety while being hunted by the Riders in Black.

Frodo arrives in Rivendell where he is healed by the Elves and reunited with Gandalf, who escaped Isengard on a Great Eagle. That night, Strider reunites with Arwen, and they affirm their love for each other. Learning of Saruman's betrayal from Gandalf and now realising that they are facing threats from both Sauron and Saruman, Arwen's father Lord Elrond holds a council of Elves, Men, and Dwarves, also attended by Frodo and Gandalf, that decides the Ring must be destroyed in the fires of Mount Doom. Frodo volunteers to take the Ring, accompanied by Gandalf, Sam, Merry, Pippin, the Elf Legolas, the Dwarf Gimli, Boromir of Gondor, and Strider—who is actually Aragorn, Isildur's heir and the rightful King of Gondor. Bilbo, now living in Rivendell, gives Frodo his sword Sting, and a chainmail shirt made of mithril.

The Fellowship of the Ring makes for the Gap of Rohan, but a storm summoned by Saruman forces them to travel through the Mines of Moria. During the journey, Gandalf informs Frodo that Gollum, released from Sauron's fortress of Barad-dûr, is following them, seeking to reclaim the ring.

After finding the Dwarves of Moria dead, the Fellowship is attacked by Orcs and a cave troll. They hold them off but are confronted by Durin's Bane: a Balrog residing within the mines. While the others escape, Gandalf fends off the Balrog and casts it into a vast chasm, but the Balrog drags Gandalf down into the darkness with him.

The devastated Fellowship reaches Lothlórien, ruled by the Elf-queen Galadriel, who informs Frodo that only he can complete the quest and that one of the Fellowship will try to take the Ring. She also shows him a vision of the future in which Sauron succeeds in enslaving Middle-earth, including the Shire. Meanwhile, Saruman creates an army of Uruk-hai in Isengard to find and destroy the Fellowship.

The Fellowship travels by river to Parth Galen. Frodo wanders off and is confronted by Boromir, who, as Lady Galadriel had warned, tries to take the Ring. Uruk-hai scouts then ambush the Fellowship. Boromir breaks free of the Ring's power and protects Merry and Pippin, but the Uruk-Hai leader, Lurtz, mortally wounds Boromir as they abduct the Hobbits. Aragorn arrives and kills Lurtz before comforting Boromir as he dies, promising to help the people of Gondor in the coming conflict. Fearing the Ring will corrupt his friends, Frodo decides to travel to Mordor alone, but allows Sam to come along, recalling his promise to Gandalf to look after him. As Aragorn, Legolas, and Gimli set out to rescue Merry and Pippin, Frodo and Sam make their way down the pass of Emyn Muil, journeying on to Mordor.