The story opens in New York City where Benjamin Siegel, an organized crime boss whose partners are Charlie "Lucky" Luciano and Meyer Lansky, visits the office of one of their lesser partners and kills him for stealing from the organization. Ben does so in full view of the man's workers, knowing his reputation will protect him. Often called "Bugsy" but hating the nickname (and willing to beat or kill someone for using it), Siegel is being sent to Los Angeles to broker a deal with another gangster, Jack Dragna, in an effort to expand their operations.
Siegel boards a train after saying goodbye to his wife Esta and their two girls. He's visited by Harry Greenberg, an old friend who is irresponsible with his end of Siegel's organization and asks Siegel for money. Disgusted, Siegel gives Greenberg a large sum and dismisses him to sit under a UV lamp and work on his tan.
Arriving in Los Angeles, Siegel is met by another old friend, the actor George Raft, who takes Ben to a studio where the movie Manpower is being shot. On the set, Ben notices a woman, Virginia Hill, who has a job as an extra. Ben is attracted to her immediately and talks to her briefly before she walks off, seemingly uninterested and insulting his ego. George drives Ben back to his hotel through Beverly Hills, pointing out the houses of famous Hollywood people. When George mentions opera singer Lawrence Tibbett, Ben asks George to leave him there. Ben meets with Tibbett himself and mildly coerces Tibbett into selling his house, offering straight cash and settling on an amount several thousand dollars more than Tibbett paid for the house. Tibbett agrees. A few scenes later, Siegel buys a luxury car from a random person on the street.
Siegel meets with Dragna and his associates at Dragna's office. Dragna isn't interested in Siegel's offer to expand his own business, much less aid Siegel & his associates. Siegel counters, saying that if Dragna won't do business, he'll have to shoot Siegel himself, and even hands Dragna a pistol. Everyone ends up laughing, however Dragna still points out that Siegel's reputation for being a psychotic hothead precedes him and agrees to the deal. When one of Dragna's associates asks why Dragna didn't shoot Siegel when the had the chance, Dragna tells him that all-out war with Siegel's partners, Luciano & Lansky, isn't worth it.
Virginia Hill shows up at Ben's new house and the two begin a torrid love affair. Ben receives a call from Dragna who tells him that his office had been robbed by a small-time gangster, Mickey Cohen. Though no one could see Cohen's face, they knew it was him. Ben asks Raft to have Cohen meet him at a spa. When Cohen arrives, Siegel politely demands the return of the money Cohen stole. Cohen unleashes a torrent of verbal insult and also tells Ben that he'd stolen a lesser amount than Dragna reported. Siegel recognizes that Cohen possesses a larger talent for collecting and enforcement and hires Cohen on the spot after Cohen agrees to give back the money he stole. Cohen also reveals that Virginia has a reputation for being promiscuous in LA, something that Ben jealously takes notice of immediately.
At home, Virginia makes an elegant dinner for Ben, who acts aloof, dropping subtle hints about Virginia's past love life. Virginia is insulted and throws an ashtray at Ben, hitting him in the head. The two are still arguing loudly when Cohen shows up with the money. Ben waits for Jack Dragna to arrive a few minutes later and shows him the cash. Ben then tells Dragna that he gave the job of running Siegel's operation in LA to Cohen, a job he'd intended to let Dragna have. Siegel then turns furious, accusing Dragna of stealing the difference in funds from the Cohen holdup for himself. After a moment of Russian Roulette and then making Dragna crawl around and bark like a dog, then oink like a pig, Ben gives Dragna the money, ordering him to return it to the the safe in the office, along with the cash Dragna himself misappropriated. Back in the dining room, Ben begins to indifferently eat the meal Virginia had prepared. Virginia, having eavesdropped on Ben's berating of Dragna, is sexually turned on and the two have sex.
Bugsy continues to make plans and snap decisions on everything - he meets a countess whose husband is in immediate contact with Benito Mussolini, and plots to kill the dictator. Bugsy begins bringing Virginia on his trips, but she refuses to fly. In the Nevada desert near the small roadside stop of Las Vegas, Ben checks out a small diner with a few slot machines that does turn a small profit but is too small to keep open. Ben closes the place and the trio heads back to LA. In the desert, after an short argument with Virginia about his family back in New York, Ben has an epiphany. He goes back to the car and tells Cohen and Virginia about it. Virginia is unimpressed and drives off with Ben's car, leaving the two stranded.
When Ben goes to his home in New York and tells his mob buddies about a new venture, The Flamingo casino/hotel, which will be located in a state where gambling is permitted, he tries to juggle the search for Virginia, the proposal to his partners, and his daughter Millicent's birthday party. His proposal is successful, but his family life is disintegrating. His business dealings intrude on Millicent's birthday, leaving her upset. Despite a promise to Virginia, he fails to ask his wife Esta for a divorce. Lansky says that he likes Ben's idea about the hotel/casino, though it will need final approval from Luciano. Ben also tells Meyer about his plans to kill Mussolini, an idea that Meyer nixes immediately. Meyer is afraid that the rest of their mob won't take Ben seriously if he talks about the plot.
Bugsy returns to Hollywood to convince Virginia of his dream -- he flies into another psychotic episode when he finds her entertaining another man. Ben throws the man through a patio door, ordering him to leave before he kills him. Virginia yells at Ben telling him that the man is her brother Chick. Ben tries to make amends by promising to buy Chick a new Cadillac. Virginia is disgusted at the thought of Ben trying to buy Chick's forgiveness and stalks off. Ben is able to talk to Virginia, telling her that the hotel he's planning to build will be named after her, "The Flamingo".
Design begins on the hotel, with Bugsy exhibiting his mania -- he seems unconcerned at first with the ballooning budget when he orders several expensive changes. Harry arrives at Ben's home in LA, having escaped from prosecutors, previously planning on informing on the mob. Bugsy takes Harry for a "drive", and Virginia insists on coming along. Bugsy and Harry get out of the car and Virgina, still in the car, hears a couple of faint gunshots. Only Bugsy returns, muttering his mantra, "Twenty dwarves took turns doing handstands on the carpet." Virginia looks nervous. At a retirement party for one of the partners, Bugsy finds Joey, Virginia's old boyfriend, and beats him almost to death over an insult. Esta finally realizes why Bugsy is spending so much time away, and demands that he ask for a divorce.
Construction on the Flamingo begins, and costs skyrocket. Bugsy gets arrested for the murder of Harry Greenberg. He's held without bail, but is afforded many luxuries, like a butler and telephone, where he continues to organize the build. Virginia runs the construction onsite, and travels back to brief Bugsy in jail. Bugsy continues to make rash decisions, and costs escalate. Meyer tries to reason with him, telling him he can help with some of the costs, and Bugsy says he'll sell his shares of the casino, just to get it built. He sells everything he can to raise money.
Bugsy is released (Ben had arranged for Mickey Cohen to send the cab driver witness out of town unharmed), and returns to Las Vegas. Cohen tells Bugsy that Virginia has been skimming money from him. One day Virginia sees Ben talking to a young woman about being a coat-check attendant and Virginia interprets his conversation as flirting. She rushes upstairs and the two have a loud argument. Virginia is fed up with Ben's grand scheming and has decided to leave him. During the argument, Ben confronts her about a private bank account she's taken out herself. More furious than ever, Virginia walks out on Ben.
The mob meets in Havana, where Charlie Luciano lives in exile, to determine whether Bugsy knew about the skimming and about the inflated cost of the hotel, which is estimated to come in at at total cost of $6 million; Meyer defends him, but knows he'll have to handle Bugsy if the hotel fails.
The hotel opens on Christmas, and is a failure. The night is severely stormy, water leaks in through the light fixtures, some of the more famous guests haven't shown up and the power goes out. Ben announces to the crowd that the hotel will be closed for an indeterminate period until it can be reopened.
Meyer orders Bugsy to fly back to LA. Before he leaves, he talks to Meyer on the phone, asking Meyer to protect Virginia no matter what happens. He also tells Meyer never to sell his shares in the hotel because the place will one day pay off. Virginia returns before he leaves and gives him back some of the money she skimmed. He refuses to take the money but forgives her. He returns home, and is assassinated in his own living room by snipers. The mob takes over the Flamingo and tells Virginia that Bugsy is dead. Title cards before the final credits state that Virginia returned the money she skimmed to Meyer and committed suicide while living Austria. However, Bugsy's investment generated billions of dollars of revenue, and Las Vegas grew into a massive city.