The story begins several thousand years ago in the Babylonian city of Ur. Legend says that the hideous monster Daimon lay hibernating in the ruins. Four thousand years later, some treasure hunters inadvertantly release him. Daimon [Chikara Hashimoto] flies straight to old Japan, where it kills samurai Lord Hyogo Isobe [Takashi Kanda]. After drinking Lord Isobe's blood, Daimon takes over his body, but when Isobe/Daimon kills the family dog and destroys the household altars sacred to Buddha, his daughter Lady Chie [Akane Kawasaki], samurai Shinpachiro Mayama [Yoshihiko Aoyama], and the household servants know something is awry. One of the altar artifacts falls into a pond. It awakens Kappa the water imp [Gen Kuroki], who comes up to take a look. Kappa notices Isobe/Daimon drinking the Steward Saheiji Kawano's [Gen Kimura] blood, turning Saheiji into a monster, too. When Kappa tries to headbutt Daimon, the monster bests him, so Kappa rounds up some of the other local Spooks and asks for their help. Unfortunately, the other Spooks don't believe a word Kappa says.
When Shinpachiro and Lady Chie find the maid Shinobu [Hiromi Inoue] with bites on her neck, Shinpachiro consults a priest, who tells him that Lord Isobe is dead and that a demon has taken his form. To destroy the demon, Shinpachiro must surround Daimon's room with three candles while the priest chants prayers of destruction. Unfortunately, the prayers backfire, and it is Daimon who kills the priest. In an attempt to secure some younger blood, Daimon and Saheiji attack a local family, but the mother and father are too quick for them. They shove their young son and daughter out the back door. After slaughtering the parents, Daimon and Saheiji go in search of the children, who have taken refuge in a "monster's shrine" where the children run into Kappa et al. When the Spooks hear that the children of the village are being killed by Daimon, they finally agree to help Kappa destroy him.
Unfortunately, their attempts to destroy Daimon do not work. When Long-Necked Woman [Ikuko Mori] tries to noose him with her neck, Daimon ties her neck into a knot. Shinpachiro tries to ward off the demon, but the ward traps the Yokai instead. Shinpachiro eventually shoots Daimon in the eye, and Daimon is forced to evacuate Lord Isobe's corpse. But there is still Saheiji to deal with, and now there is the new Magistrate, Lord Iori Ohdate [Osamu Ohkawa], newly arrived to take the place of Lord Isobe. Unfortunately, Daimon met Lord Ohdate en route and, after drinking his blood, took over his form.
Meanwhile, the Yokai Spooks are trapped in the warded jar. Fortunately, Two-Headed Woman [Keiko Yukitomo] and Umbrella wander by and find them. Although they cannot free the Spooks, Two-Headed Woman and Umbrella do agree to relay a warning to Shinpachiro regarding Saheiji. However, they arrive just in time to see Ohdate/Daimon order that Shinpachiro be executed. Oh, what to do? Daimon is more powerful than the simple, peace-loving Yakai Spooks. Two-Headed Woman and Umbrella get Lady Chie to remove the ward from the jar so that the Spooks can be free to fight the demon, but Daimon replicates himself into a half dozen clones. Just as it looks like Daimon is going to win again, Umbrella leads in an army of Spooks from all over Japan. But there are too many Daimon clones. In order to destroy Daimon, the Spooks have to dispatch the remaining eye on the real Daimon, who has made himself as tall as a giant. Stonehead hangs from Umbrella's one leg and floats up close enough to Daimon's head to stab him in the eye. Daimon is sent packing, Japan is saved, Shinpachiro is released, and all the Spooks return to their homes. [Original Synopsis by bj_kuehl.]