U.S. Marshals Edward "Teddy" Daniels (Leonardo DiCaprio) and Chuck Aule (Mark Ruffalo) are summoned to Shutter Island, a high-security mental institution housing the criminally insane, after a patient named Rachel mysteriously disappears. Teddy carries the weight of a tragic past, having lost his family in a horrific apartment fire. They meet McPherson (Ted Levine), the deputy warden, who warns them that the facility is divided: dangerous male and female patients are held separately, with the most violent individuals confined in Building C. He instructs that they cannot enter without being accompanied by both him and Dr. Cawley (Ben Kingsley).
Upon meeting Dr. Cawley, he reveals the ongoing debate in mental health treatment; one faction favors surgical interventions like lobotomies, while others advocate for the use of new psychotropic medications. Dr. Cawley informs them of Rachel, who tragically murdered her three children and now believes they are alive, mistaking the hospital staff for her neighbors. As Teddy seeks answers, he grows frustrated when Cawley declines to share any personnel files. In Rachel's room, they discover a cryptic note reading, “Where is number 67?” This leads to further tension during a staff meeting, where it surfaces that Rachel's doctor has gone on vacation, infuriating Teddy.
Teddy is haunted by frequent flashbacks from his time as a soldier in WWII, reflecting his troubled psyche. In these vivid dreams, Dolores (Michelle Williams), his deceased wife, offers him unsolicited yet haunting advice. Teddy’s unit was among the first to liberate the dreadful Concentration Camp Dachau, an experience that left him with deep-seated trauma, compounded by a horrific encounter with a German Commander. He openly admits to shooting Nazi guards in cold blood—a manifestation of his inner turmoil.
As Dr. Naehring (Max Von Sydow), Dr. Cawley's German superior, becomes a persistent figure, Teddy feels increasingly uneasy about the secrets the asylum seems to harbor. During their investigations, they discover that some patients appear to be coached, with one scribing the word RUN in his notebook. As the investigation unfolds, Teddy confides in Chuck about the arsonist Laeddis, suspecting he might also be detained on the island. However, upon searching, he finds no records.
The situation escalates when McPherson insists they change into patient uniforms, further immersing them in the twisted environment of Shutter. Crawley later reveals that Rachel has been located, stirring Teddy's dreams where he sees Laeddis seated in Cawley's chair, scarred and sinister.
When a power failure opens all the patient doors, Teddy and Chuck venture into Building C. Here, Teddy encounters George Noyce, who warns him that the only way to rescue him is to forsake thoughts of his wife and Laeddis. He learns that Laeddis has been moved to the lighthouse for a lobotomy. Despite Chuck's cautions, Teddy is determined to reach the lighthouse, only to be deterred by the rising tide.
In a cave, Teddy meets a woman claiming to be Rachel, who alleges she is a doctor against the torturous lobotomies forced upon the patients. She warns Teddy against accepting the hospital's pills and cigarettes, as it could lead to his commitment as insane due to his probing questions.
When Chuck goes missing, Crawley claims he arrived alone, deepening Teddy's isolation. His wife again appears in visions, urging him not to approach the lighthouse. In a fit of rage, Teddy destroys Crawley's car and sneaks into the lighthouse, convinced of a conspiracy to enslave him.
Inside, he realizes Crawley holds the gun he had checked in and is met with a startling admission: Teddy is actually Andrew Laeddis, who has been a patient at Shutter for two years, entangled in a role-play orchestrated by the staff to confront his delusions. Crawley explains that Rachel Solando, along with Dolores Chanal, are constructs of his mind to escape the guilt he harbors over the loss of his family, which he cannot bear to confront.
As the truth unfurls, Crawley presses Teddy to acknowledge the painful reality that he neglected Dolores' mental health, leading to the tragedy of his children’s deaths. Stripped of his fantasies, Teddy is faced with the unbearable truth of his past.
The next morning, as they discuss escaping, Chuck implies that Teddy might be heading towards lobotomy. When Teddy mentions his intent to voluntarily give up his search for the truth, it becomes evident that he may have regressed back into his fabricated reality.
