The movie begins in 1979, with a brief flashback establishing the long and tragic history of criminal activity within, and by, the Corleone family. Much has changed. Michael Corleone (Al Pacino) is now approaching 60 and feels tremendous guilt for indulging in his ruthless ambition many years ago. Although his previous conquests have made him a very rich man, the thoughts of his children, their future, happiness, and his legacy are the only things keeping him going. His adopted brother Tom Hagen is now dead. The Corleone compound at Lake Tahoe is abandoned and in disrepair. Michael and Kay (Diane Keaton) divorced in 1959, and Michael gave her custody of their children, Anthony (Franc D'Ambrosio) and Mary (Sofia Coppola).
Michael has returned to New York City, where he is using his enormous wealth and power to restore his dignity and reputation in the eyes of the public. The violent criminal element of the Corleone family has been largely abandoned, ostracized by Michael as well as the public, which no longer romanticizes the gangster lifestyle. Michael has embraced corporate America, which is now more tolerant of Michael's nihilism. He has rebuilt the Corleone interests as a legitimate enterprise using the blood money from his gangster years. The thugs and sociopathic soldiers from Michael's past (Al Neri, Willi Cicci, Calo, etc). have either died, gone into the underground, or have been relegated to the background, serving as bodyguards for Michael and his family. Michael now struggles between repairing his fragile relationships while trying to contain the violent sociopaths that are still a part of his decaying criminal empire. In an attempt to break with the past, Michael creates a charity, the Vito Corleone Foundation, in memory of his father. At a ceremony in St. Patrick's Cathedral, presided over by Archbishop Gilday, Michael is named a Commander of the Order of St. Sebastian. Kay, who has remarried, sits with Michael's children at the ceremony.
At the lavish party following the ceremony, Kay and Michael have a somewhat uneasy reunion. Anthony tells his father that he is going to drop out of law school to pursue a career as an opera singer. Kay supports his choice, but Michael disagrees, wishing that his son would finish law school or join the family business. Michael eventually acquiesces to Anthony's wishes. Meanwhile, Vincent Mancini (Andy Garcia), Sonny Corleone's illegitimate son (with Lucy Mancini), shows up at the party. He is embroiled in a feud with Joey Zasa (Joe Mantegna), the Corleone family's mafioso muscle who has been running the Corleone Family's crime businesses in New York for the past 20 years. What remains of the old Corleone criminal empire is now under Zasa's stewardship. However, the Corleone's old neighborhood in New York's Lower East Side is in ruins, and has become lawless.
In Michael's study, Vincent and Zasa tell him about their feud. The discussion grows violent, with Vincent accusing Zasa of being an out-of-control monster who mocks Michael behind his back. Michael makes it clear that he is not "a gangster" and that whatever bad blood exists between Vincent and Joey Zasa is none of his business, and must be settled between only them. He asks the two men to make peace with one another. The two men embrace, but Zasa insults Vincent by whispering "bastardo" in his ear. Enraged, Vincent bites off part of Zasa's ear. Zasa is escorted out and Michael scolds Vincent for his violent ways. However, impressed by Vincent's passionate loyalty to protect him, Michael agrees to take his nephew under his wing. The party concludes with a family picture where Michael asks Vincent to join the rest of the family.
That night, two men break into Vincent's apartment, after Vincent has spent the night with a female journalist, named Grace Hamilton (Bridget Fonda), whom he picked up at the party. Vincent brutally kills one in order to frighten the other into revealing Zasa as the man who sent them. Vincent then ruthlessly kills the second man.
Later, in an attempt to garner respectability and wealth for the Corleone Family through legitimate enterprise, Michael seeks to buy the Vatican's shares in Immobiliare, an international real estate holding company, of which 25% is controlled by the Vatican. With the help of his new lawyer B.J. Harrison (George Hamilton), he negotiates the transfer of $600 million to the Vatican Bank with Archbishop Gilday, who has plunged the Holy See into tremendous debt through his poor management and corrupt dealings. While in Vatican City, Michael learns that several influential parties oppose the deal for many reasons, not the least of which is the extensive criminal history that has tarnished the Corleone name. Because of this and the failing health of Pope Paul VI, ratification of the deal will be far more complicated than he had anticipated.
Don Altobello (Eli Wallach), an elderly New York mafia chief, tells Michael that his old New York partners want in on the Immobiliare deal. A meeting is arranged in Atlantic City, and Michael appeases most of the mafiosi with generous payoffs from their casino days. Zasa, however, gets nothing. Furious, he declares that Michael is his enemy, and tells everyone in the room they must choose between him and Michael. Zasa storms out of the meeting. Don Altobello runs after him to try and talk to him about this irrational move. Minutes later, a helicopter hovers above the conference room and sprays a barrage of bullets through the ceiling windows. Almost everyone is killed, but Michael, Vincent, and Michael's long-term bodyguard and caporegime, Al Neri, manage to escape. Back at his apartment in New York, as Michael considers how to respond to this hit, he suffers a diabetic stroke, and is hospitalized. During the diabetic attack, in a near-delirium, Michael screams out the name of his brother, Fredo, whose murder he had ordered some 20 years earlier.
Though they are cousins, Vincent and Mary begin a romantic relationship. Unbeknownst to Michael, Vincent, with the urging of his aunt Connie, plots revenge against Joey Zasa. During a street fair similar to that seen in The Godfather Part II, Vincent and his accomplices kill Zasa's bodyguards, and Vincent, disguised as a mounted New York police officer, shortly murders Zasa himself. Michael, still hospitalized, berates Vincent when he finds out, but Vincent insists that he got the go-ahead from Al Neri and from Connie, who has become deeply involved in family affairs. Michael insists that Vincent end his relationship with Mary because Vincent's involvement in the family puts Mary's life in jeopardy. Vincent agrees.
The family travels to Sicily. Michael tells Vincent to speak with Don Altobello and, in order to see where the old man's loyalties lie, to intimate to him his intentions of leaving the Corleone family, under the pretense that his affair with Mary still exists, and that his loyalty to Michael has been supplanted by his desire to continue the relationship. Altobello supports the idea of Vincent switching his allegiance, and introduces him to Licio Lucchesi, the man behind the plot to prevent Michael's acquisition of Immobiliare.
Michael also has lunch with Kay, and asks forgiveness for his behavior 20 years earlier. He also tells her that he never planned to go into a life of crime. Kay admits that she still loves Michael, and the two make plans to begin a new life together.
Michael visits Cardinal Lamberto, a well-intentioned and pious priest, to speak about the Immobiliare deal. Lamberto convinces Michael to make his first confession in thirty years; among other sins, Michael confesses to ordering the killing of his brother Fredo. After confessing Michael breaks down in tears. He is told by Lamberto that it is "just that he should suffer," and that although he could tell Michael to repent, he knows Michael would not. Nevertheless, he absolves Michael of his sins. Touring Sicily with Kay, who has arrived for Anthony's operatic debut, Michael also asks for her forgiveness. As both admit that they still love each other, Michael receives word that Don Tommasino, his Sicilian friend and ally of the Corleone Family for half a century, has been killed (by a famous assassin), signaling that a new round of violence is about to begin. Cardinal Lamberto is elected Pope John Paul I, which means that the Immobiliare deal will likely be ratified, due to his intention to "clean up" the dealings of the Vatican. The new Pope's intentions come as a death knell to the plot against the ratification of the Immobiliare deal, prompting frantic attempts by the plotters to cover their own tracks.
Vincent tells Michael what he has learned from Altobello: Lucchesi is behind the plot against the Immobiliare deal, and a master assassin known as Mosca da Montelepre (the man who killed Tommasino), has been hired by Altobello to kill Michael. Vincent wants to strike back, but Michael cautions him, saying that if he goes ahead with such a plan, there'll be no going back. Vincent insists on revenge, and Michael relents. He makes Vincent head of the Corleone family, the new Godfather. In exchange for the promotion, Vincent agrees to put an end to his heated relationship with Mary once and for all.
The family travels to Palermo to see Anthony perform the lead in Cavalleria Rusticana at the renowned opera house Teatro Massimo. Meanwhile, Vincent makes plans to seek revenge against the Corleone family's enemies.
Interspersed with scenes from Anthony's performance are the brutal murders of the enemies of the Corleone family. Michael Corleone's theme, Halls of Fear, is mainly played during the murders:
Keinszig is assaulted by Vincent's men. His body is hanged over the bridge, to make his death an apparent suicide.
Archbishop Gilday has the tea of the Pope poisoned. The Pope soon drinks it and dies.
At the opera, Don Altobello eats a dish of poisoned cannoli that his goddaughter Connie serves him. He soon dies silently at the opera as Connie watches through her opera glasses.
Al Neri shoots Archbishop Gilday as he climbs a spiral staircase and flings the archbishop's body down the stairs.
Finally, Corleone 'button man' Calo (Franco Citti) approaches Don Lucchesi and whispers to his ear "Power wears out those who do not have it" before stabbing Lucchesi in the throat with his own pair of glasses, killing him. Immediately, Calo himself is killed by Lucchesi's bodyguards.
Mosca, the assassin hired by Don Altobello to kill Michael, descends upon the opera house during Anthony's performance, killing two of Vincent's men who delay his opportunity, and the opera ends before he has the chance to kill Michael with his rifle. The assassin retreats to the opera house facade's staircase, and tries to shoot Michael there. Mary is confronting her father about the forced break-up with Vincent, when two shots ring out. The first hits Michael in the shoulder. The second hits Mary in the chest, and she dies calling out to her father, "Dad?" Vincent then kills the assassin with a single shot, striking him in the chest. As Kay cradles Mary's bloody body in her arms, Michael screams with primal pain and rage.
The scene dissolves to a short montage of Michael's memories, the first being a dance with Mary, the second being a dance with his first wife, Apollonia, and the last being a dance with Kay. The film ends in an unspecified year, showing an aged and broken Michael, seated in the front yard of his Sicilian villa. He slowly puts on a pair of sunglasses, drops an orange from his hand, slumps out of his chair, collapses to the ground, and slowly dies, completely alone. A small dog sniffs around his body and the screen fades to black as Mascagni's "Intermezzo" from Cavalleria Rusticana resolves to a high F major chord.