The story is set in the Valley of Peace, a fictional land in ancient China inhabited by anthropomorphic animals. Po (Jack Black), a young, clumsy and overweight panda, is a kung fu fanatic who idolizes the Furious Five – Tigress (Angelina Jolie), Monkey (Jackie Chan), Mantis (Seth Rogen), Viper (Lucy Liu), and Crane (David Cross) – a quintet of kung fu masters trained by the red panda Master Shifu (Dustin Hoffman) to protect the valley. Because he works in his goose father Ping's (James Hong) noodle restaurant, Po is unable to achieve his dream of becoming a kung fu master himself.
One day, Shifu's mentor, the elderly tortoise Master Oogway (Randall Duk Kim), has a vision that Shifu's former student and foster son, the snow leopard Tai Lung (Ian McShane), will escape from prison and return to the Valley of Peace to take revenge for being denied the Dragon Scroll, which is said to hold the secret to limitless power. Shifu holds a kung fu tournament for the Furious Five so that Oogway may identify the legendary Dragon Warrior, the one kung fu master worthy of receiving the Dragon Scroll and defeating Tai Lung. Po arrives too late before the doors to the tournament close and, desperate to see the Dragon Warrior as Oogway is about to make his decision, straps himself to a set of fireworks and rockets into the sky, crashing into the middle of the arena; to the surprise of everyone present, Oogway chooses Po, seemingly by accident.
Unwilling to believe that a big, fat panda can be the Dragon Warrior, Shifu attempts to get rid of Po by berating and ridiculing him into quitting his training with the Furious Five, who similarly despise and mock Po for his lack of respect and skill in kung fu. After receiving helpful advice from Oogway, however, Po endures his grueling training and slowly begins to endear himself to the Five with his tenacity, culinary skill and good humor. By this time, Tai Lung escapes from prison as foreseen by Oogway, who passes away after making Shifu promise he will train Po. Still unable to grasp the basics of kung fu, Po despairs he has no chance of defeating Tai Lung until Shifu discovers that Po is capable of impressive physical feats when motivated by food and, using the promise of a meal, successfully trains Po to incorporate these skills into a makeshift yet effective kung fu style.
Meanwhile, the Furious Five set out on their own to stop Tai Lung themselves, only to return following their defeat. Shifu decides Po is ready to receive the Dragon Scroll which, upon being opened, reveals nothing but a blank, reflective surface. Thinking the scroll is useless, Shifu orders Po and the Five to evacuate the valley while he fights Tai Lung to delay him as long as possible. The dejected Po meets with his father Ping who, in an attempt to console him, reveals that the long-withheld secret ingredient to his famous "secret ingredient soup" is nothing, saying that things become special if people believe them to be. Realizing this is the point of the Dragon Scroll, Po goes to confront Tai Lung after he nearly kills Shifu. Po proves to be a formidable challenge for Tai Lung as he tries to protect the Dragon Scroll to lure the villain away from Shifu, but it eventually falls into Tai Lung's grasp. However, he is unable to understand or accept its symbolic meaning, and Po ultimately defeats him using the secret "Wuxi Finger Hold". Po is praised by the Valley of Peace and earns the respect of the Furious Five, who fully acknowledge him as a true kung fu master. Shifu, exhausted but alive after his fight with Tai Lung, is finally at peace with himself now that peace has returned to the valley.