In 2154, the RDA corporation is mining Pandora, a lush, Earth-like moon of the planet Polyphemus,[22] in the Alpha Centauri star system.[5] Parker Selfridge (Giovanni Ribisi) heads the mining operation, which employs Marines for security. The corporation intends to exploit Pandora's reserves of a valuable mineral called unobtanium. Pandora is inhabited by the Na'vi, a ten-foot-tall blue-skinned species of sapient humanoids with tails.[23] The Na'vi live in harmony with nature, worshiping a mother goddess called Eywa.

Pandora's atmosphere is toxic to humans, forcing them to use breathing masks. Attempting to improve relations with the natives and learn about Pandora's biology, scientists grow Na'vi bodies modified with human DNA, called avatars, controlled by genetically matched, mentally-linked human operators.[24] Jake Sully (Sam Worthington), a paraplegic former marine, replaces his twin brother, a scientist trained to be an avatar operator, who has been killed. Doctor Grace Augustine (Sigourney Weaver), the head of the Avatar Program, considers Sully an inadequate replacement for his brother and relegates him to a bodyguard role.

In their avatar forms, Augustine, biologist Norm Spellman (Joel David Moore) and Jake leave the base on a mission to take biological samples and reestablish peaceful relations with the Na'vi. A predator attacks the group, and Jake becomes separated and lost. Facing more predators at night in Pandora's jungle, he is rescued by Neytiri (Zoe Saldana), a female Na'vi. Neytiri brings Jake to Hometree, which is inhabited by her clan, the Omaticaya. Neytiri's mother Mo'at (C. C. H. Pounder), the clan's shaman, shows interest in the warrior "Dream-walker" and instructs her daughter to teach Jake their ways. Colonel Miles Quaritch (Stephen Lang), leader of the security forces, enlists Jake to bring him intelligence about the natives that could help RDA convince the Na'vi to leave Hometree so the company can mine the huge unobtanium deposit underneath Hometree. He promises Jake that he will help him obtain the expensive neuroregeneration treatment to restore the use of his legs.

At first, Jake delivers key strategic information to Quaritch. Augustine becomes suspicious and relocates herself, Jake and Norm to a remote scientific outpost with an avatar link module. Over three months, Jake grows close to Neytiri and the Omaticaya, eventually rejecting RDA's agenda. He is initiated into the Omaticaya, and he and Neytiri choose each other as mates. Jake reveals his change of allegiance when he disables a bulldozer as it destroys the tribe's "Tree of Voices". Quaritch secretly monitors Jake's video diary, where Jake admits that the Omaticaya will never abandon Hometree. Selfridge orders Hometree destroyed.

Augustine argues that the destruction of Hometree could affect the bio-botanical neural network that all Pandoran organisms are connected to, and Selfridge gives Jake and Augustine one hour to convince the Na'vi to leave Hometree. Jake reveals his original mission to the Omaticaya, and Neytiri sees him as a betrayer. Jake and Augustine's avatars are taken captive. Quaritch's forces arrive and destroy Hometree, killing Neytiri's father, who is the clan chief, Eytucan (Wes Studi), and many others. Jake and Augustine are disconnected from their avatars and detained for treason along with Norm. Trudy Chacón (Michelle Rodriguez), a security force pilot disgusted with Quaritch's violence, breaks them out and flies them to the link module, which they relocate to a new, hidden place. During their escape, Quaritch shoots Augustine.
To regain the trust of the Omaticaya, Jake tames a Toruk, a powerful flying beast that only five Na'vi have ever tamed. Jake finds the Omaticaya at the sacred Tree of Souls and pleads with Mo'at to heal Augustine. The clan attempts to transfer Grace from her dying body into her Na'vi avatar with the aid of the Tree, but she succumbs to her injuries before the transfer is complete. Mo'at declares that "she is with Eywa now".

With the assistance of Neytiri and Tsu'Tey (Laz Alonso), the new leader of the Omaticaya, Jake assembles over two thousand of Na'vi from other clans to repel the humans. Jake prays to Eywa, via neural connection to the Tree of Souls, to intercede on behalf of the Na'vi in the coming battle. Quaritch notes the mobilization of Na'vi clans and convinces Selfridge to authorize a preemptive strike on the Tree of Souls. Because it is a center of Na'vi religion and culture, its destruction would leave the Na'vi too demoralized to resist further encroachment.

As the security forces attack, the Na'vi strike, using their knowledge of the forest, but suffer heavy casualties, among them Tsu'Tey and Trudy. Suddenly, the Pandoran wildlife joins the attack on the corporation's forces, overwhelming them. Neytiri interprets this as Eywa answering Jake's prayer. Jake destroys the main bomber before it can reach the Tree of Souls. Quaritch finds the avatar link module where Jake's human body is located and attacks it, exposing Jake to Pandora's atmosphere. Neytiri kills Quaritch and saves Jake. With the attack repelled, Neytiri and Jake reaffirm their love as she sees his human body for the first time.

Selfridge and the remaining corporate personnel are expelled from Pandora, while Jake, Norm, and the scientists studying Pandora are allowed to remain. Jake is seen wearing the insignia of the Omaticaya leader. The clan performs the ritual that permanently transfers Jake from his human body into his Na'vi avatar.