In the prologue, a fight between Japanese martial artist Ryu and Muay Thai champion Sagat rages until Ryu severely scars Sagat across the chest with a Shoryuken. Sagat vows revenge against Ryu. Years later, following the assassination of a Justice Minister by Cammy, a hypnotized MI6 Agent, Interpol agent Chun-Li suggests that they join forces with the United States Military to destroy the enigmatic crime syndicate known as Shadowlaw. Captain Guile, who is out for revenge against Shadowlaw’s leader, M. Bison, for the death of his best friend, initially refuses, but eventually relents when Chun-Li later tells him that Bison killed her father years ago and she herself wants revenge, but knows that her duty comes first. At the Shadowlaw base, Bison, along with his bodyguards Balrog, Vega, and Sagat, orders a worldwide manhunt for Ryu, determined to induct him into his organization, and sends out hundreds of monitor cyborgs to find more valuable martial artists for their cause. However, Ryu, who is traveling the world to seek out worthy challengers, such as Fei-Long, Dhalsim, and E. Honda, remains undetected due to suppressing his Ki.
Meanwhile, Ryu’s American best friend and fighting rival, Ken Masters, has settled down with his girlfriend, Eliza, but still yearns for a good challenge and desires a rematch with Ryu. During a tussle with T. Hawk, who had sought out Ken to challenge him, Ken is seen by a monitor cyborg and the footage of the fight is sent to the Shadowlaw base. Bison sees the footage and learns of Ken’s history with Ryu, and decides to hunt him down and hypnotize him in Ryu’s stead. Along the way, Bison sees Chun-Li and Guile warning Dee Jay about the monitor cyborgs and destroying one in the process, and subsequently sends Vega to New York to kill Chun-Li. Vega ambushes Chun-Li in her apartment, but after a bloody fight, Chun-Li knocks Vega through the wall of the building and he falls to his death, yet she is badly wounded and falls into a coma. Guile arrives and rushes her to the hospital. He also learns of Ryu and Ken from Interpol, and after learning that Bison has captured Ken, Guile rushes to Thailand to warn Ryu, who is training in the mountains with E. Honda.
Bison, however, follows Guile and confronts them. He sets the hypnotized Ken on Ryu, who initially refuses to fight back. Honda battles Balrog while Guile faces Bison and is severely beaten, though Bison spares his life as a final insult. As Ryu prepares to retaliate against Ken, memories of their past wreak havoc on Ken’s mind and he manages to break free of Bison’s mind control. The enraged Bison unleashes his Psycho Power upon Ken and casts him afar before turning his attention to Ryu, who fights Bison with very little success. Ken uses his master’s Ki teachings to mend his body and joins the fight. With their combined forces, Ryu and Ken eventually pummel Bison into submission and hurl a joint Hadouken at him, apparently destroying him. Honda defeats Balrog and rescues both Guile and Balrog. The United States Military locate and destroy Bison’s base. Chun-Li makes a full recovery and reunites with Guile in the hospital, informing him that their mission was a success. Elsewhere, Ryu and Ken part ways once again and Ryu begins his journey anew. However, he is ambushed from behind by a huge truck, with the driver revealed to be Bison, who survived the battle. The film closes as Ryu leaps towards the truck to fight Bison again.