Plot
In a fairy tale, Princess Moanna, whose father is the king of the underworld, visits the human world, where the sunlight blinds her and erases her memory. She becomes mortal and dies from illness. The king believes that eventually, her spirit will return to the underworld.
In post-Civil War Spain in 1944 (after Francisco Franco has come into power), protagonist Ofelia travels to a village in Northern Spain with her pregnant mother Carmen to meet Captain Vidal, her new stepfather and the father of Carmen's unborn child. Vidal, the son of a famed commander who died in Morocco, believes strongly in Falangism and was assigned to hunt down republican rebels.
A large stick insect, which Ofelia believes to be a fairy, leads Ofelia into an ancient labyrinth, but she is stopped by Mercedes, Vidal's housekeeper, who is spying for the rebels. That night, the insect appears in Ofelia's bedroom, where it becomes a fairy and leads her through the labyrinth. There, she meets the faun, who believes her to be the reincarnation of Princess Moanna. He gives her three tasks to complete before the full moon to acquire immortality. Meanwhile, Vidal murders two individuals detained (erroneously) on suspicion of cooperation with the rebels.
Ofelia completes the first task of retrieving a key from the belly of a giant toad, but becomes worried about her mother, whose condition is worsening. The faun gives Ofelia a mandrake root, which cures Carmen's illness and soothes her pain. Accompanied by three fairy guides, Ofelia then completes the second task of retrieving an ornate dagger from the lair of the Pale Man: a child-eating monster who sits silently in front of a large feast. Although she was warned not to consume anything, she eats two grapes, awakening the Pale Man. He eats two of the fairies and chases Ofelia, but she manages to escape. Infuriated at her disobedience, the faun refuses to give Ofelia the third task.
Vidal tortures a captive rebel, and then kills Doctor Ferreiro—who is also a rebel collaborator—after he euthanizes the prisoner. Shortly afterwards, Vidal catches Ofelia tending to the mandrake root. Carmen throws it into the fire, where it writhes and screams in agony. Carmen immediately develops painful contractions and dies giving birth to a son. Soon after, Vidal discovers that his housekeeper Mercedes is a spy. Ofelia is locked in her bedroom, and Mercedes is taken to be tortured; however, she frees herself, injures Vidal, and rejoins the rebels.
The faun returns to Ofelia and tells her to take her baby brother into the labyrinth. Ofelia steals the baby after sedating Vidal, who pursues her through the labyrinth while the rebels successfully take over the mill at which he is stationed. The faun tells Ofelia to open the portal to the underworld by sacrifice of her brother's blood, but Ofelia refuses to harm her brother; for further disobeying his orders, the faun leaves Ofelia to her fate. Vidal reaches the labyrinth, only to find Ofelia talking to either an imaginary subject (Ofelia was hallucinating the fairy tale parts) or an invisible subject (the faun is only visible to Ofelia). Vidal takes the baby from her arms and shoots Ofelia; then, upon reaching the labyrinth's entrance to leave he is surrounded by the rebels. Knowing that he will die, he hands Mercedes the baby without a struggle and demands that Mercedes tell his son the exact time of his father's death. Mercedes replies that his son will never even know his name, and her brother Pedro kills Vidal.
As Mercedes enters the labyrinth and comforts the dying girl, drops of Ofelia's blood fall down the center of a spiral staircase onto an altar; Ofelia then appears in a golden throne room. The king of the underworld explains that the last test was a trick to ensure that Ofelia would rather spill her own blood over the blood of an innocent. The faun is also present, along with the three fairies. He praises Ofelia for her choice and addresses her as her Majesty. The queen of the underworld, her mother, invites Ofelia/Moanna to sit by her father and rule at his side. The scene then cuts back to the labyrinth, where Ofelia dies smiling. The epilogue completes the tale of Princess Moanna, stating that she ruled wisely and left quiet traces of her time in the human realm, "visible only to those who know where to look".