The film opens with highlights of events from the first movie: Jor-El condemning three Kryptonian villains, General Zod, Non, and Ursa, to the Phantom Zone and sending his son, Kal-El, to Earth in a rocket ship, the launching of the two XK-101 missiles, Superman being trapped in the swimming pool by wearing the Kryptonite necklace by Lex Luthor and being rescued by Ms. Teschmacher, and Superman diverting the XK-101 missile programmed to hit Hackensack, New Jersey into outer space.
The Phantom Zone drifts through space towards Earth because the shock waves after the destruction of Krypton sends it on a new course, and the XK-101 missile explodes near it, causing shock waves that destroy the Phantom Zone, freeing the three villains, who then head toward the Moon.
In The Daily Planet, editor-in-chief Perry White reads an article by Lois Lane about Superman thwarting Lex Luthor's attempts to level most of California. When Jimmy Olsen remarks to Lois Lane that Clark Kent has not been around to see Superman in action, Lois suspects that Clark is Superman after recalling that "he is never around when Superman is". She confirms this belief when she draws clothes that Clark is wearing on a picture of Superman in the newspaper; the posture of both looked almost the same. Lois, noting the uncanny resemblance, realizes who Superman is and even teases him when he arrives with her to White's office for an assignment, that she knows his true identity. She tries to prove it by jumping out of a window in Clark's presence to call his bluff. But Clark simply races outside at super-speed and seeing Lois still falling, uses his super-breath and heat vision to slow her fall and open roof curtains to act as a trampoline. Lois bounces off them and lands in a fruit stand. By the time she looks up, Clark has already raced back up to the window and looks down, appearing not to have done anything at all.
General Zod, Non, and Ursa arrive on the Moon and kill all astronauts on a joint NASA-Soviet moon expedition. They note that they have become more powerful from how easily they have killed all of the moonwalkers, having acquired more powers from being closer to a yellow Sun. They decide to fly off to Earth, which they believe to be called 'Houston', upon overhearing radio transmissions between the moon mission and mission control in Houston, Texas.
In prison, Lex Luthor devises a plan with Otis to break out. When Otis reveals to Luthor that Superman always flies north to escape radar detection, Luthor decides to track him down using a 'black box' he has created that detects alpha waves. Luthor finally breaks out of jail with the help of Ms. Teschmacher using a hot air balloon, but leaves Otis behind as bait so he can escape. Using the black box device, he goes north to the Fortress of Solitude. Luthor, activating the Fortress control panel, then learns from hologram recordings of Jor-El about the three Kryptonian villains who have escaped. He decides that he will collaborate with the Kryptonian villains to defeat Superman and take over the world.
Meanwhile, Clark and Lois have arrived at Niagara Falls, Ontario to investigate a 'honeymoon racket' assigned to them by Perry White. Lois sees a boy falling over a railing and calls for help; Clark, outside of anyone’s sight, transforms into Superman to rescue him. Later, in their suite, Lois decides to try to prove again that Clark is Superman, suspecting that it is far too convenient that Clark disappears every time Superman appears. She points a gun at Clark and, despite his urges not to do it, fires a shot. She looks with amazement as Clark, who is unharmed, then removes his glasses and, giving Lois a stern look, says, "If you had been wrong, Clark Kent would have been killed." Lois, in a humorous twist, reveals that she has used a blank in her gun.
The three Kryptonian villains arrive on Earth in a small town in Idaho, where they declare their reign over the entire planet to the townspeople after using their powers to easily stop incoming military forces. They then fly to the White House and easily defeat the military defenses that are protecting the President of the United States. Afterwards, General Zod forces the President to kneel before him in submission by threatening everyone’s lives. The President kneels with despair, praying for Superman, wherever he is, to come to the rescue.
Meanwhile, Superman takes Lois to the Fortress of Solitude, where he confesses his love for her. They eventually retire to his bedchamber and make love. Kal-El then speaks to his father through hologram about his desire to give up his responsibilities as Superman so he can live a normal life with Lois. Jor-El criticizes Kal-El for his decision, but nonetheless offers him a choice. In order for him to relinquish being Superman, he must enter a crystal chamber and be exposed to harnessed rays from the Krypton red sun. He will, therefore, lose his powers permanently and no longer be invulnerable as he has been before. Despite his father’s pleas to reconsider, Kal-El, without hesitance, enters the chamber and undergoes the de-powering process, which culminates in the destruction of the crystal control panel.
When Clark and Lois later attend a diner to eat, Clark, now powerless, finds that he can’t even handle a bullying customer named Rocky, who easily beats him up. Clark's mood is worsened when he watches on the diner’s TV box the President announcing his surrender to General Zod. Suddenly, the President pleads for Superman, to which General Zod calls out a challenge for Superman to come fight him. Clark realizes that he has to return to the Fortress and find a way to have his powers restored.
Lex Luthor finally arrives at the White House and offers the three villains a way to find Superman, who he notes is the son of Jor-El, their imprisoner, in exchange for possession of 'beachfront property': Australia. Luthor agrees to help the three villains and hopefully find a way to have Superman defeated.
Meanwhile, Clark arrives back at the Fortress, now a darkened sanctum, and calls out to his father for help. Dreading that there may be no hope left, he then notices the green crystal glowing among the remains of the destroyed control panel – the same crystal that has called out to him in the first movie. He uses the crystal to activate the panel, and once more, Jor-El emerges in hologram. He tells Kal-El about his terrible mistake and offers him one last resort to regain his powers – he will channel all of his remaining energy to his son, thereupon dying. Jor-El bids farewell and emerges in full body and spirit; upon touching Kal-El, he restores his son’s powers and dies by fading away. Kal-El emerges once again… as Superman.
The Kryptonian villains attack the Daily Planet and confront Perry White, Jimmy Olsen, and Lois Lane. Luthor advises them to take Lois as a hostage, informing them of her close relationship with Superman. Suddenly, Superman appears, taking up Zod’s challenge to fight. An epic and destructive battle ensues in Metropolis between Superman and three villains of equal power and strength. Finally, Ursa and Non throws a bus at Superman crashing him into a building. Superman, to the people of Metropolis, appears to be dead, and they try to attack the villains, who blow them back with super-breath (with much less slapstick than the Richard Lester version) Superman emerges alive, but flies off, seemingly in defeat.
Luthor offers the villains the location of Superman's address, the Fortress of Solitude, in exchange for Cuba. Together, the villains fly north, with Luthor and Lois. When they arrive at the Fortress, they confront Superman and Zod threatens Lois' life to force his surrender. However, they also betray Luthor and plan to kill him as well. Luthor seemingly sides with Superman, who tells Luthor about trying to trick the villains into entering the de-powering chamber, the same one he has used before to lose his powers. Luthor, however, double-crosses Superman and warns Zod of the trap. Zod decides to spare Luthor's life and agrees to the term of his demands. Luthor then informs them of how to activate the de-powering process and is ordered to activate it himself.
With Lois' life being threatened, Superman has no choice but to enter the de-powering chamber. After the de-powering process, Superman emerges with a look of weakness and hopelessness on his face. Zod orders him to kneel and take his hand in submission. Much to everyone’s amazement, and Zod's painful surprise, Superman crushes his hand, picks him up, and throws him across the room. Zod falls down into the abyss below. Luthor then realizes that he himself has been double-crossed into tricking the villains, since Superman has switched the process so that the de-powering rays have been set loose in the Fortress, while Superman has been safe inside the chamber. Non leaps toward Superman, only to realize that he can't fly and fall into the abyss as well. Lois then lands a punch on Ursa, knocking her off her platform into the pit.
Superman and Lois leave Luthor stranded in the Fortress and fly away. Superman then uses his heat vision to destroy the Fortress (it has been shown in a cut scene that Luthor has been arrested and taken away by police prior to this). Lois, while showing that she still loves Superman, realizes and agrees that he must continue to serve humanity, conforming to his father's wishes. After Superman flies her home, Lois begins to break down in despair. Although life would never be the same, she heartbreakingly assures Superman that she can be trusted to keep his secret identity, which Superman acknowledges consolingly, and he flies off.
Superman, realizing that life with Lois can never be, decides to turn back time, flying around the Earth at tremendous speed and reversing events that have occurred throughout, such as the destruction and mayhem done to Metropolis during Superman's battle with the villains and the shattering of the Phantom Zone that releases the Kryptonian villains, as well as Lois' knowledge of his secret identity. The status quo is finally changed back to normal, although both Lois and Perry White seem to experience a sense of déjà vu.
Clark, now with his powers restored as Superman, goes to the diner and confronts Rocky, who is more than willing to pick a fight with him. Much to everyone's surprise, this strange, young man handles the bullying customer like a little child, eventually felling him across the counter and sending him crashing into the pinball machine, knocking him unconscious. Clark then offers to pay the owners of the diner for the damage. With those around wondering how the stranger was able to beat the bully, Clark simply replies: "Oh, I’ve been … working out."
Superman then flies away from and around the Earth and into the reaches of space. Glancing around, he catches the audience's gaze, and flashes a smile. (This is the signature clip used in all four of the Reeve Superman films).