In the Second Age of Middle-earth, the lords of Elves, Dwarves, and Men are given Rings of Power. Unbeknownst to them, the Dark Lord Sauron forges the One Ring in Mount Doom, instilling into it a great part of his power, to dominate the other Rings so he might conquer Middle-earth. A final alliance of Men and Elves battles Sauron's forces in Mordor. Isildur of Gondor severs Sauron's finger and the Ring with it, thereby vanquishing Sauron and returning him to spirit form. With Sauron's first defeat, the Third Age of Middle-earth begins. The Ring's influence corrupts Isildur, who takes it for himself and is later killed by Orcs. The Ring is lost in a river for 2,500 years until it is found by Gollum, who owns it for over four and a half centuries. The ring abandons Gollum and it is subsequently found by a hobbit named Bilbo Baggins, who is unaware of its history.

Sixty years later, Bilbo celebrates his 111th birthday in the Shire, reuniting with his old friend, the wizard Gandalf the Grey. Bilbo departs the Shire for one last adventure, and he leaves his inheritance, including the Ring, to his nephew Frodo. Gandalf investigates the Ring, discovers its true nature, and learns that Gollum was captured and tortured by Sauron's Orcs, revealing two words during his interrogation: "Shire" and "Baggins." Gandalf returns and warns Frodo to leave the Shire. As Frodo departs with his friend, gardener Samwise Gamgee, Gandalf rides to Isengard to meet with the wizard Saruman, but discovers his alliance with Sauron, who has dispatched his nine undead Nazgûl servants to find Frodo.

Frodo and Sam are joined by fellow hobbits Merry and Pippin, and they evade the Nazgûl before arriving in Bree, where they are meant to meet Gandalf. However, Gandalf never arrives, having been taken prisoner by Saruman. The hobbits are then aided by a Ranger named Strider, who promises to escort them to Rivendell; however, they are ambushed by the Nazgûl on Weathertop, and their leader, the Witch-King, stabs Frodo with a Morgul blade. Arwen, an Elf and Strider's beloved, locates Strider and rescues Frodo, summoning flood-waters that sweep the Nazgûl away. She takes him to Rivendell, where he is healed by the Elves. Frodo meets with Gandalf, who escaped Isengard on a Great Eagle. That night, Strider reunites with Arwen, and they affirm their love for each other.

Facing the threat of both Sauron and Saruman, Arwen's father, Lord Elrond, decides against keeping the Ring in Rivendell. He holds a council of Elves, Men, and Dwarves, also attended by Frodo and Gandalf, that decides the Ring must be destroyed in the fires of Mount Doom. Frodo volunteers to take the Ring, accompanied by Gandalf, Sam, Merry, Pippin, Elf Legolas, Dwarf Gimli, Boromir of Gondor, and Strider—who is actually Aragorn, Isildur's heir and the rightful King of Gondor. Bilbo, now living in Rivendell, gives Frodo his sword Sting, and a chainmail shirt made of mithril.

The Fellowship of the Ring makes for the Gap of Rohan, but discover it is being watched by Saruman's spies. They instead set off over the mountain pass of Caradhras, but Saruman summons a storm that forces them to travel through the Mines of Moria. After finding the Dwarves of Moria dead, the Fellowship is attacked by Orcs and a cave troll. They hold them off but are confronted by Durin's Bane: a Balrog residing within the mines. While the others escape, Gandalf fends off the Balrog and casts it into a vast chasm, but the Balrog drags Gandalf down into the darkness with him. The devastated Fellowship reaches Lothlórien, ruled by the Elf-queen Galadriel, who privately informs Frodo that only he can complete the quest and that one of his friends in the Fellowship will try to take the Ring. Meanwhile, Saruman creates an army of Uruk-hai in Isengard to find and kill the Fellowship.

The Fellowship travels by river to Parth Galen. Frodo wanders off and is confronted by Boromir, who tries to take the Ring as Lady Galadriel had predicted. Uruk-hai scouts then ambush the Fellowship; their leader, Lurtz, mortally wounds Boromir as he fails to stop them from taking Merry and Pippin as prisoners. Aragorn arrives and kills Lurtz before comforting Boromir as he dies, promising to help the people of Gondor in the coming conflict. Fearing the Ring will corrupt his friends, Frodo decides to travel to Mordor alone, but allows Sam to come along, recalling his promise to Gandalf to look after him. As Aragorn, Legolas, and Gimli set out to rescue Merry and Pippin, Frodo and Sam make their way down the mountain pass of Emyn Muil, journeying on to Mordor.