Just as the original Nightmare on Elm Street began with the creation of Freddy's notorious glove, New Nightmare opens with a more modern and ominous version being forged. As the creator appears to sever his own hand to attach the claws, the crew flinches while the director, Wes Craven, urges the special effects team to add more blood to the scene. Soon after, he commands, > "Cut! Print that, Gretchen Oehler!"
We are introduced to Heather Langenkamp, her husband Chase, and their son Dylan as they wander through the film set of the latest Nightmare on Elm Street. However, the prop claw suddenly comes to life, wreaking havoc and claiming the lives of the special effects team. Just as it turns to mutilate Chase, Heather screams, jolting awake in her own bed amidst an earthquake shaking Los Angeles. Once things calm down, Chase shows minor scratches that resemble those he had sustained in the nightmare, prompting Heather to wonder about their true origin.
That very day, Heather appears on a morning talk show to commemorate the 10th anniversary of the Nightmare franchise. During the broadcast, Robert Englund surprises her by bursting onto the set in full Freddy costume, which leaves Heather feeling unsettled. Following the show, producer Bob Shaye invites Heather to his office at New Line Cinema. He reveals that Wes is working on a new and final script, inviting Heather to reprise her iconic role as Nancy. However, Heather declines, troubled by her unsettling dreams, mysterious phone calls, and her son's alarming behavioral changes. Bob also informs her that her husband is involved in the production and has developed a terrifying new glove for Freddy, much to Heather's consternation.
Upon returning home, she finds Dylan in the throes of a disturbing episode, ominously warning her, "Never sleep again!" Alarmed, Heather implores Chase to return, but he tragically falls asleep at the wheel and dies in what appears to be a car accident. When Heather identifies his body, she notices troubling claw-like marks on his chest, adding to her growing suspicions. Meanwhile, Dylan's odd behaviors intensify due to the grief of losing his father.
Desperate for answers, Heather seeks out Wes Craven for clarity on the strange events unfolding around her. Wes confesses that he shares the same confusion, having been writing down vivid dreams that suggest pure evil can be temporarily encapsulated within art, allowing it a means of expression. He explains that Freddy Krueger embodies this malevolence, viewing Heather as the gatekeeper due to her character Nancy's past victory over him. This time, however, Freddy is intent on breaking Heather down before facing her directly.
After taking a brief nap in Dylan's room, Heather awakens to find her son missing. Descending the stairs, she stumbles upon him in another trance-like episode. In a frantic attempt to protect him, Heather brings Dylan to the hospital. There, she learns that her son's troubling actions include mimicking Freddy and singing his infamous theme song. Amidst rising tensions, a babysitter named Julie enters the scene, revealing her own nightmare involving Dylan. While the medical staff prepares to sedate him, they are interrupted by Julie, who protects Dylan at all costs—even resorting to violence against hospital staff.
As chaos erupts, Freddy makes his grand return by brutally attacking Julie in a manner reminiscent of Tina Gray's death in the original film. The nurses discover the horrifying scene, but Heather becomes increasingly concerned about Dylan's whereabouts. She recalls their home being close by and rushes there, only to find Freddy dangling Dylan over traffic. Upon arriving, she realizes that Freddy is distorting reality, forcing her back into her role as Nancy and transforming her home into that of Elm Street itself.
In a final confrontation within a nightmarish landscape, Heather takes sleeping pills to enter a lucid dream where she attempts to rescue Dylan. Together they face off against Freddy, who attempts to overpower Heather. In a desperate moment, Dylan uses a knife to free his mother, and together they manage to trap Freddy in a furnace, a fiery end reminiscent of the tale of Hansel and Gretel. As the flames consume Freddy, his true form is revealed while Heather and Dylan escape back to reality, where they discover the script that Wes has been working on.
Dylan, eager for reassurance, asks his mother to read from it: "We open on an old wooden bench. There's fire and tools, and a man's grimy hands building what's soon revealed as a gleaming set of claws. And the claws are moving now as if awakening from a long and unwanted sleep...."
