Before the credits roll, the film opens with a dreamlike jitterbugging scene, featuring a girl, Naomi Watts, who, after a brief performance alongside an elderly couple, steps forward to accept applause. The narrative quickly shifts to a dark-haired woman (Laura Harring), who narrowly escapes her murder in a car accident on Mulholland Drive. Injured and disoriented, she finds herself descending into the chaotic landscape of Los Angeles. Detectives investigating the incident speculate on a woman's mysterious journey into the city. As dawn breaks, she breaks into an apartment that is just being vacated by an older, red-headed woman.
Meanwhile, in a diner called Winkies, a man shares a disturbing dream with his friend, describing a horrific figure lurking behind the diner. When they take a closer look, the fearsome figure appears, causing the man to faint in terror. As the dark-haired woman sleeps, a series of eerie phone calls about her presence are made, adding to the growing mystery.
In this tangled web, a budding actress named Betty Elms (Naomi Watts) arrives at Los Angeles airport, accompanied by two accidental companions from earlier scenes. The ominous elderly couple resurfaces, glimpsed leaving in a limousine, their smiles laced with foreboding. Upon reaching her aunt's apartment, where the dark-haired woman has found refuge, Betty mistakenly assumes she is there with her aunt. She expresses her delight to be in this "dream place," while the woman, now adopting the name "Rita," thanks to a Gilda movie poster, struggles with her identity.
Complications escalate when a hapless hitman, Mark Pellegrino's character, steals a notebook filled with crucial phone numbers, resulting in the deaths of three individuals. A Hollywood director, Adam Kesher (Justin Theroux), faces pressure from mobsters to cast an unknown actress, Camilla Rhodes ([Melissa George]), in his film. As he resists their demands, Adam leaves in frustration, only to return home to the shocking discovery of his wife's affair with Gene (Billy Ray Cyrus). In a fit of rage, he destroys his wife’s jewelry and is forcibly removed from the house by Gene, leading him to financial ruin.
Adding to the tension, Adam encounters a mysterious figure referred to as The Cowboy, who advises him to consider casting Camilla Rhodes for his own benefit. Determined to help Rita uncover her memory, Betty finds a considerable sum of money and a peculiar blue key in Rita's purse. Their quest for answers leads them back to Winkies, where they meet a waitress named Diane, and Rita eerily remembers the name “Diane Selwyn.”
Betty impresses casting agents during an audition, where Adam immediately recognizes the talent in Camilla. However, she escapes before their paths can cross, hoping to fulfill a promise to meet a friend. The journey takes a darker turn when Betty and Rita break into Diane Selwyn’s apartment, only to discover a lifeless body, which petrifies them. In a moment of intimacy, Rita dons a blonde wig, prompting a night filled with passion and whispered declarations of love between the two women.
Their adventures lead them to an eerie venue known as Club Silencio, where an enigmatic host reveals the illusionary nature of their experiences. He is followed by a woman who performs Roy Orbison's "Crying" with haunting allure, only for it to be revealed she was lip-syncing. As Betty discovers a blue box matching Rita's key in her purse, things take a surreal turn when they return home to find Rita unlocking the box, which ominously falls to the ground, resulting in a visit from the older red-headed woman.
The narrative spirals into chaos as Diane Selwyn (Naomi Watts) awakens, revealing her identity as a once-aspiring actress now engulfed by despair over her unrequited love for Camilla Rhodes (Laura Harring). Diane's heartbreak intensifies when she witnesses a closeness between Camilla and Adam at a party, leading her to commission a hitman to eliminate Camilla. The film crescendos to a tragic end, where Diane, terrorized by visions and guilt, takes her own life after confronting her painful reality. In the closing moments, a haunting whisper of "Silencio" echoes, leaving the audience questioning the illusions they've witnessed.
