The film opens in the Forbidden City in 1887, where Chon Lin (Fann Wong) is drinking tea with her father, the Keeper of the Imperial Seal of China. She tells him her brother, Chon Wang (Jackie Chan), is doing well as a sheriff in Carson City, Nevada, United States, but her father replies that her brother is dead to him. At that moment, Lord Nelson Rathbone (Aidan Gillen), leads a band of Boxers into the city, who attack the Keeper. Rathbone stabs him and leaves with the seal. As he lies dying, he gives Lin a puzzle box and a letter to Chon Wang.
Back in the Wild West, Chon Wang is doing well as sheriff, having captured an impressive array of fugitives. His deputy is relaxing with a book called "Roy O'Bannon Vs. The Mummy", a highly fictionalized account of the events of the first film that now portrays Wang's "Shanghai Kid" as a cowardly sidekick.
Wang receives a parcel, which contains the puzzle box and Lin's letter, telling him their father is dead and that she has tracked the murderer to London.
Chon Wang travels to New York City to find his old partner Roy O'Bannon (Owen Wilson), needing his share of the gold left over from the first film to buy his ticket. Roy has left his brief stint in law enforcement, broken off his romance with Falling Leaves, spent most of the gold investing in the Zeppelin, and is now a hotel waiter and part-time gigolo. After they attempt prostitution to pay for a trip to England, the Mayor of New York arrives in search of his daughters, Roy's latest clients. Chon Wang fights off a number of New York police officers, and he and Roy ship themselves to London in a crate. On the way, Wang tells Roy about his father, and Roy swears an oath to help reclaim the seal.
During a meeting with the British Parliament, Rathbone gives word of trouble going on in China and even presents a gift to the Queen from the Emperor as a Bengal Tiger. The Parliament find this action appalling and insulting.
In London, Wang and O'Bannon have their duster and watch stolen, respectively, by a number of street thugs including a young boy named Charlie (Aaron Johnson). After an extensive battle to reclaim these items, they are arrested by the police. In Scotland Yard, Inspector Artie Doyle (Thomas Fisher) thanks the two for defeating the Fleet Street gang and gives Roy his watch that Charlie had stolen. He tells Wang that Lin is also in Scotland Yard, having attempted to kill Lord Rathbone and been dubbed "Looney Lin". Doyle is a reader of the Roy O'Bannon novels, and is enthralled to meet the actual Roy O'Bannon. Roy tries to use this to get Lin released, but it does not work. Meanwhile, Rathbone finds himself not alone in his carriage as Wu Chow (Donnie Yen) sneaks his way on and the two exchange a quick conversation and Rathbone slips him the dagger that killed the Keeper of the Imperial Seal. Sometime later, Roy and Wang wander through London, seeing Buckingham Palace. They encounter Charlie, who lets them into the empty house of a nobleman. Charlie brings it to their attention that the nobleman has an invitation to a gala at the castle.
Roy and Wang don disguises: Roy masquerades as Major General "Sherlock Holmes" (a name he derives from the face of a clock), and Wang is the "Maharaja of Nevada". After turning down the offer to try some spotted dick, Wang and Roy follow Lord Rathbone to a private library. Once they enter, they cannot find him; he has slipped through a secret passage, which Wang discovers in a fireplace. As Roy occupies himself with a copy of the Kama Sutra, Wang enters the secret room, which contains treasures from throughout the British Empire. Rathbone's guards attack Roy, but he is rescued by Lin, who has escaped from Scotland Yard. The three see Rathbone hand the Imperial Seal to Wu Chow, the bastard little brother of the Emperor of China. Rathbone sees them and sets fire to the building, but young Charlie shows up and makes off with the Seal, Lin escapes through the roof, and Wang and Roy commandeer Rathbone's primitive automobile (one, though, which didn't actually exist in 1887, one of the many anachronisms in the movie) for a wild ride, culminating in them crashing into Stonehenge.
While unconscious after the car crash, Roy has a sexual fantasy involving Lin and the Kama Sutra, and he decides to start pursuing her, much to Wang's dismay. Lin finds them and gives them a ride to Whitechapel, where they stay in a rundown inn. Wang tells Lin about Roy's vices and problems, which Roy overhears. Lin does not flinch, but Roy is devastated at the betrayal. Wang however quickly makes it up to him by convincing several female prostitutes to have a sexy pillow fight with Roy.
Lin, surprisingly, walks in on the fiasco and is heartbroken at the sight of Roy taking part in all the shenanigans. They all find themselves surrounded by Rathbone and a squad of boxers who apprehend the three. Taken to a covered pier, tied up and left defenseless, Wang and Roy finally encounter Wu Chow, his second-in-command Liu (Tom Wu) and his Boxers. Wu Chow ties her up to try to locate the Seal, but they do not know where Charlie has taken it. He tells them the grand scheme: Rathbone would kill the bearer of the Seal and return the item to Wu Chow, who would use the Seal to unite the enemies of China and claim the throne. In return, Wu Chow would use a Gatling gun to dispatch the Royal Family, leaving Rathbone, who is tenth in line to the throne, King.
Chon Wang and Roy escape and track down Artie Doyle, who has developed an investigative technique called deductive reasoning, which he uses to find that Charlie has been hiding at Madame Tussauds wax museum. They reclaim the Seal, but it is taken by Boxers, and the three are arrested for trespassing. Charlie (who reveals his full name to be Charlie Chaplin, another anachronism because the movie is actually set 2 years prior to Chaplin's birth) breaks them out, and they go to Queen Victoria's Jubilee Ball, where the Royal Family will be.
Sure enough, Wang finds Wu Chow and Lin as well on the fireworks barge, kills Liu, unties Lin, and dismantles Wu's plan. However, Wu proves himself to be an accomplished martial artist, surpassing Wang in skill, but Lin arrives in time to kill him with a fireworks rocket and save Wang. Artie and Roy, who have found their way into the Houses of Parliament, confront Rathbone and prevent his escape. Before Artie can arrest him, Rathbone shoots him in the shoulder. Roy and Wang pursue Rathbone up into Big Ben, where they engage him in a sword fight. Rathbone pushes Roy out of the glass front of the clock, but Roy catches himself on one of the clock's hands. Rathbone nearly defeats Wang, but Wang's rage over his dead father and fallen comrade leads him to suicidally grapple with Rathbone, sending both of them flying out the clock face. Luckily, Roy catches Wang, as Rathbone plummets to his death. Roy and Wang decide to jump by gripping hold of a large British Flag drapped over Big Ben and land in the carriage containing Queen Victoria.
Roy and Wang are knighted, as is Artie, whose full name is now Sir Arthur Conan Doyle. Artie decides to become a writer, his stories revolving around his deductive reasoning technique, and asks Roy if he can use the "Sherlock Holmes" name. Roy and Lin kiss, and Roy proposes that he and Wang go to Hollywood to get in on the ground floor with motion pictures (motion picture, though, was only invented in 1894 and Hollywood only became a center of movie-making thirty years after the movie, another anachronism). They roll off in a buggy, with Charlie stowed away. Wang also manages to open the box his father sent him, finding a message inside reminding him of the importance of family.