In the Southeast Asian nation of Shadaloo, civil war has erupted between the forces of drug lord-turned General M. Bison and the Allied Nations led by Colonel William F. Guile. Bison has captured several A.N. relief workers, and via a live two-way radio broadcast, demands Guile secure a US$20 billion ransom in three days. Guile refuses and vows to track Bison down and place him on trial for his crimes, but his assistant, Sergeant Cammy, is only partially able to pinpoint Bison’s location to the river-delta region outside the city. One hostage is Guile’s friend Sergeant Carlos “Charlie” Blanka, who Bison orders taken to his lab for his captive doctor and scientist, Dhalsim, to turn into the first of his supersoldiers. Though Charlie is severely disfigured by the procedure, Dhalsim secretly alters his cerebral programming to maintain Charlie’s humanity.
American con artists Ryu Hoshi and Ken Masters attempt to swindle arms dealer Viktor Sagat by providing him with fake weaponry. Sagat sees through the ruse and has Ryu fight his cage champion, Vega, but Guile bursts in and arrests everyone present for violating a curfew. In the prison grounds, Guile witnesses Ryu and Ken fighting Sagat’s men, and recruits them to help him find Bison in exchange for their freedom, since Sagat is Bison’s arms supplier. They are given a homing device and win Sagat’s trust by staging a prison escape and faking Guile’s death. However, news reporter Chun-Li, whose father was killed by Bison, and her crew, former sumo wrestler E. Honda and boxer Balrog, who are out for revenge against Sagat for ruining their careers, stumble across the plan, and over Guile’s objections, attempt to assassinate the two warlords at a party. To maintain Bison’s trust, Ryu and Ken stop the assassination and reveal the conspirators to Bison.
Returning to his base, Bison inducts Ryu and Ken into his organization and orders Honda and Balrog imprisoned and Chun-Li taken to his quarters. Ryu and Ken break Balrog and Honda out of confinement and rush to confront Bison, who is fighting Chun-Li, but Bison escapes and releases sleeping gas, sedating them all. Guile plans his assault on Bison’s base. He is impeded by the Deputy Secretary of the A.N., who informs Guile that the decision has been made to pay Bison the ransom, but Guile and his loyal troops nevertheless proceed with the mission. At the base, Dhalsim is found out by a security guard; during the ensuing fight, Charlie is released, and he kills the guard to protect Dhalsim. Guile arrives and sneaks into the lab, where he encounters Charlie. Guile prepares to shoot Charlie to end his suffering, but Dhalsim stops him. Bison prepares to kill the hostages by unleashing Charlie on them, but Guile emerges and engages Bison’s guards until the remaining A.N. forces arrive. After Bison makes it clear that he will not surrender peacefully, Guile orders his allies to rescue the hostages and engages Bison in a personal duel. As Guile and Bison fight, Ryu and Ken defeat Sagat and Vega. Bison’s computer expert Dee Jay flees through a secret passage, joined by Sagat, while Bison’s bodyguard, Zangief, engages Honda in a fight until learning from Dee Jay that Bison was the true enemy, and sides with Ryu and Ken to save the hostages.
Guile gains the upper hand against Bison and kicks him into a bank of hard drives, electrocuting him. A revival system restores Bison and he reveals that his suit is powered by electromagnetism, enabling him to fly and fire electricity. Bison takes control of the fight, beating Guile viciously, and moves to deal the death blow, but Guile counters by kicking Bison into his monitor wall, finishing him off and overloading the base’s energy field. The hostages are rescued, but Guile stays behind to convince Dhalsim and Charlie to return with him. They refuse, with Dhalsim wishing to atone for his part in mutating Charlie. Guile flees the exploding base and reunites with his comrades.
In a post-credits scene, Bison is revived once again amidst his ruined command center to try his hand at world conquest one more time.