The game is set two months after the events of the first Resident Evil, in the Midwestern American mountain community of Raccoon City. Nearly all of its citizens have been transformed into zombies by an outbreak of the t-Virus, a new type of biological weapon secretly developed by the pharmaceutical company Umbrella. The game's two protagonists are Leon S. Kennedy, a rookie police officer on his first day in the local force, and Claire Redfield, a college student looking for her brother Chris. Having just arrived in the city, Leon and Claire make their way to the Raccoon Police Department, seeking protection from the mutated population. There, they discover that most of the policemen have been killed already, and that Chris has left town to investigate the Umbrella headquarters in Europe. With no remaining motivation to stay, the two protagonists split up to look for other survivors and flee the city. While searching for an escape route, Claire meets a little girl named Sherry, who is on the run from an unknown creature, and Leon encounters Ada Wong, who claims to be looking for her boyfriend John, an Umbrella researcher.
It is revealed that Leon's superior officer, Raccoon City police chief Brian Irons, had been bribed by Umbrella to hide evidence of the company's experiments in the outskirts of the city. He also concealed their development of the new G-virus, an agent capable of mutating a human into the ultimate bioweapon. Irons tries to murder Claire, but is killed by a G-virus mutant in the police department. Thereupon, Claire and Sherry escape through the sewers and become separated. After splitting up with Leon, Ada comes upon Sherry, and picks up a golden pendant the girl loses while running away. Further into the sewers, Ada reluctantly teams up with Leon again, after he insists on his duty to protect her. They encounter a middle-aged woman who fires at Ada, but Leon dives between them and takes a bullet himself. Ada ignores the unconscious Leon and follows the woman, who reveals herself to be Sherry's mother Annette and the wife of William Birkin, the Umbrella scientist who created the G-virus. In an attempt to protect his life's work from special agents sent by the Umbrella headquarters, he injected himself with the virus, which turned him into the malformed creature that is now chasing Sherry. Annette recognizes her daughter's pendant and attempts to take it from Ada. A fight ensues, during which Annette is thrown over a railing. Ada learns that the golden locket contains a sample of the G-virus, and later – taken over by her emotions – returns to Leon, tending to his bullet wound.
Meanwhile, Claire is reunited with Sherry, and discovers that the mutated Birkin has implanted his daughter with an embryo to produce offspring. Leon, Ada, Claire and Sherry advance through an abandoned factory connected to Umbrella's secret underground research facility. An attack by Birkin leaves Ada heavily wounded, and Leon explores the laboratory to find something to treat her wounds. He is interrupted by Annette, who explains to him that Ada's relationship with John was only a means of getting information about Umbrella: Ada is a spy sent to steal the G-virus for an unknown organization. Just as Annette is about to shoot Leon, a T-103 appears and she is forced to retreat. Ada returns to save Leon, and defeats the Tyrant seemingly at the cost of her own life. She confesses her love to Leon, who leaves behind her motionless body. Meanwhile, Annette tries to escape with another sample of the G-virus, but is fatally wounded by her mutated husband. However, before she dies, she tells Claire how to create a vaccine that will stop the mutations caused by the embryo within Sherry. After preparing the cure, Leon and Claire reunite at an emergency escape train, and inject Sherry with the vaccine, which saves her life. Birkin – now mutated into a large agglomeration of flesh and teeth – follows them, but is destroyed when a self-destruct system causes the train to explode. After escaping from the city with Sherry, Leon intends to take down Umbrella, while Claire continues to search for her brother. Ada is implied to have survived and to have made away with the G-virus in the pendant.