After spending three years in a psychiatric facility, the former Chief Inspector of the Sûreté, Charles Dreyfus, finally regains his sanity and sheds his obsession with eliminating Inspector Jacques Clouseau. His psychiatrist informs him that he’s scheduled to appear before a sanity board that afternoon for a possible release. However, Clouseau, who has replaced Dreyfus as Chief Inspector, unexpectedly arrives to advocate for his former boss. In a chaotic turn of events, Clouseau inadvertently drives Dreyfus back into insanity within a mere five minutes. Dreyfus later breaks out of the hospital, attempting once more to assassinate Clouseau by planting a bomb in his apartment while Clouseau sparred with his manservant, Cato. The explosion devastates Clouseau's residence and injures Cato, yet Clouseau miraculously escapes unharmed, thanks to an inflatable hunchback costume.
Determined to see Clouseau eliminated, Dreyfus devises a more intricate scheme involving hiring professional criminals. He kidnaps renowned nuclear physicist Professor Hugo Fassbender and his daughter Margo, coercing the professor to construct a "doomsday weapon" in exchange for their release. Meanwhile, Clouseau travels to England to investigate the abduction. His clumsy interrogation of the staff at the Fassbender household, including the cross-dressing butler Jarvis, creates chaos. Tragically, Jarvis meets his demise at the hands of the kidnappers, but not before Clouseau uncovers a crucial lead that directs him to the Oktoberfest in Munich, West Germany.
As Dreyfus utilizes Fassbender's device to obliterate the United Nations Building in New York City, he blackmails world leaders, including the President of the United States and his Secretary of State, into orchestrating Clouseau’s assassination. This leads to a comical series of blunders where multiple assassination attempts are made. Ironically, Clouseau's sheer obliviousness results in all the hired killers turning on each other, leaving only operatives from the Soviet Union and Egypt alive.
At one point, one of Dreyfus's henchmen, masquerading as Clouseau, is mistakenly shot by an Egyptian assassin. This Egyptian then finds himself seduced by Russian operative Olga Bariosova, who is likewise misled and ultimately falls for him. When Clouseau arrives at his hotel room, he is bewildered to find Olga waiting for him, leading to yet more misunderstandings. From her, Clouseau eventually pieces together Dreyfus's whereabouts to a castle in Bavaria. Dreyfus, oblivious to the fact that Clouseau is still alive, is excited by the fake news of Clouseau’s demise but suffers from a toothache and requests a dentist.
Upon arriving in Bavaria, Clouseau, disguised as a German dentist, manages to infiltrate Dreyfus's castle despite earlier missteps. Unbeknownst to Dreyfus, Clouseau renders them both helpless with nitrous oxide. In a fit of laughter and chaos, Clouseau mistakenly extracts the wrong tooth, leading Dreyfus to uncover Clouseau’s disguise. Clouseau narrowly escapes while a furious Dreyfus prepares to unleash the doomsday machine upon England.
In a twist of fate, as Clouseau evades Dreyfus's henchmen, he accidentally sabotages Dreyfus’s plans when a medieval catapult launches him onto the doomsday machine, causing it to malfunction and explode, disintegrating Dreyfus and the castle into nothingness. With the remaining group—Fassbender, his daughter, and Clouseau—safely escaping the crumbling stronghold, Dreyfus provides a final odd spectacle, playing "Tiptoe Through the Tulips" on the castle organ as he dissolves away.
Upon returning to Paris, Clouseau discovers Olga waiting for him at his place. However, their romantic encounter is thwarted when Clouseau struggles to remove his clothes and then falls prey to Cato’s latest surprise attack, which sends all three tumbling into the Seine River as the bed crashes through the wall.
