Set in late 19th century London, the film tells of rival magicians Robert Angier (Hugh Jackman) and Alfred Borden (Christian Bale). Alfred Borden is on trial for the murder of his rival, Robert Angier. In flashback, during a trick, Angier falls into a water tank under the stage and Borden watches him drown. Borden is convicted and incarcerated. During his time, he receives Angier's personal diary.

As he reads the diary, we see its story in flashback. Borden and Angier start off as assistants for the same magician, under Cutter's lead. During one trick, the "Water Escape," Angier's wife is bound and lowered into a water tank and locked in. The trick is that she can slip her wrist out of the knots and, through a hand-size trap hole at the top, reach out and undo the trick lock to escape. A conversation takes place about the fact that the knot used could give way as she's being lowered into the tank, which would cause her to fall and possibly injure herself severely. Borden suggests a different knot, and Angier's wife agrees, but the others say it's too risky. During one performance, Borden tries using the different knot. Unfortunately, Angier's wife cannot free her hands, and she drowns in front of everyone before the tank can be smashed open. Both Angier and Borden proceed to pursue their own careers as magicians; Borden going on to hire a shady character, of few words, known as Fallon. During his upstart career, Borden meets a young lady known as Sarah and proceeds to court her. They eventually marry and have a daughter. Ironically, As a later reffered clue, Sarah claims to be able to know when Borden loves her and when he does not. She claims that some days he does and some days he is lying and he doesn't.

At one magic performance, Borden decides to close with the "Bullet Catch" trick. Unfortunately, the volunteer pulled up on stage to fire the gun turns out to be a disguised Angier, who places a round into the gun and asks Borden which knot he put on his wife's wrists, and why he repeatedly and oddly denies to remember which knot he had used. Angier then shoots Borden's ring and pinky fingers off. Some time following this event, Cutter approaches Angier proposing to get back into the business. The two hire a beautiful assistant named Olivia (Scarlett Johansson) to help distract the audience.

As a closing act, Cutter and Angier decide to make a dove disappear into thin air using a mechanical apparatus attached to Angier's back. Borden, in disguise, becomes a volunteer in the trick and trips the trick cage before the Turn, killing the dove and trapping another volunteer's fingers in the cage, injuring her. Angier's reputation is tarnished. Both magicians continue to make modest performances until Borden astonishes crowds with a trick known as "The Transported Man." In the trick, Borden bounces a ball across the stage, disappears into a box, instantly reappears within another box across the stage, steps out, and catches the bouncing ball.

Angier and Olivia are amazed and Cutter himself has no explanation for it except that Borden must be using a double. However, Angier and Olivia are not convinced of this because the man who walks out looks identical, talks identically, and even has his two fingers missing. Angier and Cutter develop their own version of the trick, termed the "The New Transported Man." In this trick, Angier tosses his hat across the stage, disappears behind a door and seemingly reappears across the stage to catch the hat. With this trick however, Angier disappears under the stage while a similar-looking actor shoots up on the other side of the stage at the same time. Thus, the actor enjoys the applause while Angier is forced to listen from backstage.

Angier, clearly unhappy with the trick tries to figure out Borden's version, because he wants to be on stage to receive the audience's applause himself. Because of pride and ambition he sends Olivia to Borden to steal his secrets. Unfortunately, Olivia falls in love with Borden and decides to double-cross Angier. Fame and publicity follow both actors until one night, Borden thwarts Angier's trick (by binding up the double) and advertises for his Transported Man trick during Angier's show. Angier and Cutter, furious that Borden has ruined their show, captures Fallon and seals him in a coffin. Angier ransoms Fallon off for the key to Borden's trick. Borden simply supplies Angier with one word, "TESLA," claiming that that is not only the key to the cipher of Borden's notebook (which Olivia had brought to Angier) but also the key to the trick. Angier decides to travel to Colorado Springs to meet with Nikola Tesla (David Bowie) and learn the secret.

Angier spends quite a while in America while Tesla constructs a machine that resembles a Magnifying Transmitter. Each test fails as they attempt to accomplish some unknown feat with a top hat. After placing a cat in the apparatus and again watching the machine fail, Angier storms outside only to find a clone of the cat playing with its original. Astonishingly, surrounding the cats are dozens of top hats, each identical to the hat used in the experiments. Therefore, the machine Tesla has produced replicates any object placed under the electrical arc and transports it to a distant location.

With his new "trick" prepared, Angier returns to London to produce one final set of shows. He employs the help of Cutter again to produce the stage props but insists that Cutter remain front stage for these shows. Angier only uses blind stage hands to help him behind the stage. Angier's show opens to critical and commercial success and Fallon and Borden are absolutely perplexed at how it is accomplished. In the new trick, Angier disappears under huge arcs of electricity and suddenly reappears in the balcony. He travels fifty meters in only a second.

Borden thinks that a trap door is used, but the balcony reappearance baffles him since the balcony is such a great distance from the stage. One night, Fallon follows Angier and his blind stagehands after a show and discovers that every night they transport a large, covered water tank across town and discard it underground. Borden, upon hearing of this news, decides to wash his hands of the matter and insists that Fallon simply leave Angier alone.

However, we then see that Borden has decided to watch the trick one more time (in disguise). Borden sneaks backstage. Under the stage sits a water tank, and when the trap door opens, Angier falls in. The trick lock does not open and Angier drowns to his death. We now see that Borden in fact tries to smash apart the water tank and save Angier, and that he's unable to do so quickly enough. Borden is tried and convicted for the death of Angier, and sentenced to death by hanging, which brings the story to the beginning scenes.

In prison, Borden receives word that his daughter will become a ward of the state unless he decides to give up the secret of his "transported man" trick to a certain Lord. He obliges but decides that he will not reveal all until he can see his daughter for the last time. He reaches the end of Angier's diary, where Angier writes that he hopes Borden enjoys his time in prison where he should be rotting for his wife's death.

When the Lord Caldlow comes to greet Borden in prison with his daughter, it is revealed that he is actually Angier - who should be dead. Borden offers to reveal his secret to Angier, and gives Angier the papers that he alleges will explain it, but Angier doesn't care and tears up the sheets without reading them. Borden is subsequently hanged. Angier, pleased that everything has gone to plan, decides to bury all secrets underground. He brings Tesla's apparatus down to where the water chambers are and is ambushed by Borden. Borden proceeds to shoot Angier and reveals that he and Fallon are one and the same.

They are actually twins who have been living as one another all their lives, so well that one loved Olivia and one loved Sarah, but neither lady knew they were twins and played one another. Therefore, for the "Original Transported Man" trick, Borden/Fallon disappered behind a door and the other brother reappeared at the otherside of the stage. They were so committed to the lie that Fallon/Borden chiselled off his fingers to replicate the other brother. Angier, now dying, reveals that for the "Real Transported Man" trick, each time Angier falls down the trap door, he plunges into the water tank and proceeds to drown. The replicated Angier lives on and the drowned corpses are stored underground. Angier dies from the bullet wound and Borden lives on. After Borden leaves, the shot closes in on one of the tanks with another Angier clone, imitating death smiling inwardly inside.