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 very ill and eventually dies. The king believes that eventually, her spirit will return to the underworld. In post-Civil War Spain in 1944 (after Francecisco Franco has come into power), protagonist Ofelia travels 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 Princess Moanna and 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.