In 1827, a small group of people settled around a bay; among them was a newlywed couple, Sonny and Matilda Dixon. The town soon began to grow due to its quickly developing fishing industry. Local stores began to spring up, and people started to cultivate the land.
However, in 1836, tragedy struck the small town, now called Darkness Falls, when Sonny Dixon was killed in a fishing accident, leaving his wife Matilda a widow. After her husband's death, Matilda became very close to the town's children. She would tell them stories, and give them gifts and gold coins when they lost a tooth, thus earning the nickname "Tooth Fairy".
After a fire in her home left her horribly scarred, disfigured, and with an extreme sensitivity to light, she wore teeth-mask (which was made out of teeth), and only went out at night.
One night, two of the town's young boys went missing, and they quickly blame Matilda. She was arrested, stripped of her mask, and hanged. Soon afterwards, the two missing boys returned home unharmed, and the town realized its grave mistake. A massive cover-up of the murder soon followed, and Matilda's body was buried.
A year later, the first of many strange occurrences began. In 1842, the supply of whales and seals vanished from the sea; only their bones were left on East Beach. Freak storms began to terrorize the town and frequently resulted in the sinking of fishing boats. The two children who Matilda was accused of kidnapping vanished after leaving a suicide note at the town's lighthouse; their bodies were never found.
Nearly 10 years later, the local cemetery was moved to make way for local expansion. During the move, Matilda's body disappeared and was never seen again. Since then, children have mysteriously disappeared from Darkness Falls, never to be seen again. Some claimed that they ran away, while others believed it was yet another chapter of the Tooth Fairy's curse.
And so, the story of the Tooth Fairy was born. The vengeful spirit of Matilda Dixon would visit the home of children in Darkness Falls the night they lost their last baby tooth. If the child laid eyes on her, she would whisk them off and murder them. Her weakness in life remained with her in death; she had an extreme sensitivity to light.
One boy, Kyle Walsh, learns that the story is more than just a story the night he loses his last baby tooth. He finds it hard to fall asleep after hearing stories of Matilda, and takes a flashlight to bed with him. As he tries to sleep, he hears a raspy breath over his bed, and dares to open his eyes. He sees the masked face of Matilda herself. Frightened, Kyle shines the flashlight into her eyes, causing her to recoil in pain. He runs out of his room to his mother, who assures him that there is nothing to be afraid of. As Kyle's mother goes to investigate, she sees Matilda for herself, and is brutally murdered by the angry spirit. Kyle, hearing his mother's death, hides in the bathroom with the lights on, preventing Matilda from reaching him. The next morning, the police show up and believe that Kyle has murdered his mother. They arrest him and take him away.
Years later, Kyle has left Darkness Falls and moved to Las Vegas - a city where the lights never turn off. He always carries a bag of flashlights and lanterns with him in fear of Matilda finishing what was started many years before. One day, an old childhood friend, Caitlin Greene, calls to ask for his help with her younger brother, Michael, who also seems to have survived an encounter with the Tooth Fairy. Michael, like Kyle, now has a gripping fear of the dark, and is thought to have gone insane. Kyle returns, knowing that Michael is not crazy, and tries to help him. Since two people have now escaped from Matildas wrath, it has caused her to become more active; revealing herself to dozens of people, and killing them all in her quest to get Kyle and Michael.
Kyle, Michael, and Caitlin now must escape from Darkness Falls while avoiding the darkness until morning, just as one of the freak storms knocks out all the lights in the town.
Soon the storm hits the village with a loud bang and wallop and almost every light in the village is turned out. The last remaining light is only that of the Light House situated at the far coast of the village. A fight ensues between Kyle and Matilda, and he manages to knock her mask away from her face - revealing the scarred flesh. They then illuminate the Lighthouse's lantern and throw Matilda in to it, where she ignites and turns in to a ball of flame and is thrown off the balcony. As she catches fire her spirit is destroyed forever.