The film begins with fourteen-year-old Katara (Nicola Peltz) and her fifteen-year-old warrior brother, Sokka (Jackson Rathbone), near a river at the South Pole. They soon followed some tracks of a tiger seal. When they looked beneath their feet, there was something glowing below. An ice sphere appeared with a boy named Aang and a flying bison named Appa trapped inside when Sokka hits the floor with his boomerang. Unknown to them, Aang (Noah Ringer) is the long lost Avatar - a spiritual figure that holds the world in balance through every incarnation. However, his disappearance allowed the Fire Nation to declare war on the other nations (the Air Nomads, the Water Tribes and the Earth Kingdom) in their attempt to conquer the world. Zuko (Dev Patel), an exhiled prince of the Fire Nation, is on a quest to find the Avatar and bring him as prisoner to his father, the Fire Lord Ozai (Cliff Curtis). Seeing the light that appeared from Aang's release, Zuko and some Fire Nation soldiers arrive at the Southern Water Tribe to demand the villagers to bring out their elderly under the impression that the Avatar must be an old person. But Aang reveals himself as he surrenders himself to Zuko on the condition that he agrees to leave the village alone. On the ship Aang is tested by Zuko's Uncle Iroh (Shaun Toub) to confirm him to be the Avatar. After being informed that he is to be their prisoner for passing the test, Aang escapes using his glider and flies to his flying bison brought by Katara and Sokka. Aang and his new friends visit the Southern Air Temple and he learns that he was in the ice for a whole century and that the Fire Nation wiped out all Air Nomads, including his guardian, Monk Gyatso (Damon Gupton). In despair, he enters the Avatar state and finds himself in the spirit world where he encounters a dragon spirit that tells him to make his way to the Northern Water Tribe to master Water Bending.
While at small Earth Kingdom town controlled by the Fire Nation, Aang's group is arrested because Katara tries to help a young boy (Isaac Jin Solstein) from a patrol. They incite a rebellion by reminding the disgruntled Earthbenders that earth was given to them. Katara is given a Waterbending scroll that she uses to perfect her Waterbending and help Aang learn Waterbending as they make their way to the Northern Water Tribe and liberate more Earth Kingdom villages in the process. During a side track to the Northern Air Temple on his own, Aang is betrayed by a peasant and captured by a group of Fire Nation archers, led by Admiral Zhao. However, a masked marauder, the "Blue Spirit", helps Aang escape from his imprisonment. Aware that Zuko is the "Blue Spirit", Zhao arranges to kill the prince. Zuko survives the attempt on his life. With Iroh's help, he sneaks aboard Zhao's lead ship as his fleet departs for the Northern Water Tribe to execute the plan he and Ozai set up with the scrolls from the Library detailing the spirits there.
Upon arriving, Aang's group is welcomed warmly by the citizens of the Northern Water Tribe. Immediately, Sokka befriends the Northern Water Tribe princess, Yue (Seychelle Gabriel). After a few agreements, a waterbending master, Pakku (Francis Guinan), teaches Aang waterbending. Soon, the Fire Nation arrives and Zhao begins his attack while Zuko begins his search for the Avatar on his own, capturing Aang as he enters the spirit world to find the dragon spirit to give him the wisdom to defeat the Fire Nation. Returning to his body, Aang battles Zuko before Katara freezes him. As the battle escalates, Iroh watches Zhao capture the moon spirit Tui, which with its water spirit counterpart had assumed the form of a fish. Despite Iroh's pleas, Zhao kills Tui to strip the the Waterbenders to lose all of their powers and abilities to Waterbend. Yue explains to everyone that the moon spirit gave her life, willing to gave it back as she dies in the process. With the tables turned, Zhao is drowned by Waterbenders after Zuko and Iroh leave him to his fate. Aang uses the ocean to drive the armada back. Aang now fully embraces his destiny as the Avatar as he, Katara and Sokka prepare to continue their journey to the Earth Kingdom to find an earthbending teacher for Aang. When news of Zhao's death and Iroh's betrayal reaches Fire Lord Ozai, he appoints his daughter Azula to capture both her uncle and Zuko along with dealing with the Avatar before Sozin's Comet returns.