Soon after the death of his father, Prince Taj Kabir Bedi of Sakkar is pressured to compete for the hand of Princess Yasmine Pavla Ustinov of Baghdad. He is ambushed by agents of his own Wazir Jaudur Terence Stamp, his royal seal stolen and an innocent man murdered in his place. Arriving in Baghdad, dressed in rags and hungry, he befriends Hassan Roddy McDowall, a magician and thief, who becomes an uneasy ally as Taj strives to clear his name.
Stealing suitable robes, Taj and Hassan present themselves to the Caliph Peter Ustinov, where Taj makes an immediate impression on Yasmine. Jaudur, bearing Taj's seal, arrives on a flying carpet and claims to be king, accusing Taj of imposture. A duel follows, but Taj is bested because Jaudur—an evil sorcerer—seems immune to injury, his soul hidden in a secret place and thus making him effectively immortal.
Bound by custom, the Caliph is compelled to entertain Jaudur’s claim. Yasmine’s maid Perizadah Marina Vlady recalls a prophecy spoken at Yasmine’s birth—that her marriage would bring immense wealth—and uses this as a delaying tactic while the court searches for a truth greater than appearances. Taj and Hassan join a quest for “the object in all the world that has the most value,” a journey that lasts three moons and will determine the fate of everyone involved.
As the pair press on, Perizadah secretly guides them to overhear the treacherous Abu Bakare, the holy man Frank Finlay, as Jaudur extorts information. They discover the existence of an all-seeing eye that can reveal the truth and help Taj overcome the impostor. They steal Jaudur’s flying carpet, but when Taj orders it to “take me to where my heart would go,” it stubbornly stays by Yasmine’s side. Hassan then commands, “Carpet, take us where I would go,” and the carpet carries them to the temple housing the eye.
At the temple, the gatekeeper warns Taj to stay on the righteous path, or risk being turned to stone. Taj endures insults about his parentage, resists rescuing a man devoured by a serpent, and nearly falls to a deadly fire trap. He is challenged by visions that tempt him away, including a statue of a failed challenger, which strengthens his resolve.
With the temple in sight, Hassan is momentarily drawn off course by an image of Yasmine and falters, nearly neglecting the serpent’s lure. The eye, however, remains elusive at first. The inscription at Hassan’s feet, “The truth lies within thy reach,” finally dawns: the eye is actually within reach, and by seizing it, Taj is restored. He uses the eye to learn Yasmine’s true desire and to uncover the secret location of Jaudur’s soul—nestled inside a mysterious bird.
The two companions attempt to return to Baghdad on the carpet, but Jaudur’s men on flying horses ambush them and slash the carpet to pieces. Taj and Hassan fall in different directions, and Jaudur returns with the eye to Baghdad, while the other suitors return with their extravagant gifts. When Yasmine gazes into the eye and finds Taj missing in the desert, the Caliph realizes Jaudur’s deception, and Taj’s rightful claim is confirmed. Jaudur uses a hypnotic spell to sway Yasmine, her father, and the people to accept the marriage.
Taj discovers a bottle in the sand; when opened, a giant genie emerges who tries to kill him. Taj outsmarts the genie by sending him back into the bottle, where the genie offers three wishes if released. Taj first asks to be reunited with Hassan, who rests in an oasis surrounded by beautiful harem girls. His next wish sends them to the bird’s nest—the soul’s location of Jaudur. In the nest, Taj uses his sword to crack the egg and release the soul. The bird returns, and Hassan frees the genie, who drives the bird away and transports them back to Baghdad just in time to stop the wedding.
Taj then shatters Jaudur’s soul to the floor, breaking the sorcerer’s hold and lifting the hypnotic spell. The grateful Caliph blesses Taj and Yasmine’s union, while Hassan and Perizadah escape on Jaudur’s fully restored flying carpet, soaring into a hopeful future.
