Zohan Dvir (Adam Sandler) is a superhuman yet kindhearted Israeli counter-terrorist and the finest and most respected soldier in the IDF. However, he has become bored and sickened by the constant fighting, secretly dreaming of moving to the USA and becoming a hairdresser. While on a mission to thwart a Palestinian terror group being led by his personal arch-enemy, Fatoush "the Phantom" Hakbarah (John Turturro), Zohan fakes his own death and smuggles himself onto a flight to New York, cutting his own hair and taking the alias "Scrappy Coco" (the names of two dogs he shared the flight with) while claiming that he is "half Australian, half Mount Everest." Meanwhile the Phantom becomes rich and famous for supposedly killing Zohan, gaining his own fast food business.
Initially unsuccessful in getting hired at several salons, Zohan's military expertise earns him a new friend, Michael (Nick Swardson), who gives him a place to stay. However, Michael starts to regret it when he finds Zohan making out with his mother. Zohan encounters a fellow Israeli named Oori (Ido Mosseri) at a disco, who recognizes Zohan but agrees to keep his identity a secret. Oori takes him to a block in lower Manhattan filled with Middle Easterners who are split between a Palestinian side and an Israeli side of the street.
Zohan attempts to land a job in a struggling salon of a Palestinian woman named Dalia (Emmanuelle Chriqui). After first only allowing Zohan to sweep floors for free, she eventually allows him to be a stylist after he pleases an older customer with a satisfactory haircut and back-room sexual service. Zohan's reputation spreads instantly among the elderly women of lower Manhattan and Dalia's business booms, upsetting Grant Walbridge (Michael Buffer), a corporate magnate who has been trying to force out all the local tenants on the block so that he can build a mall.
Zohan is identified by a Palestinian cab driver named Salim (Rob Schneider), who bears a grudge against Zohan for taking his goat away from him. Salim convinces his friends to help him kill Zohan, but is forced after a failed bombing attempt to contact Phantom, who Salim attempts to blackmail, but ends up getting the stiff end of the deal as he convinces Phantom to visit New York to find Zohan.
Meanwhile, Zohan realizes that he has fallen in love with Dalia, and comes clean to Michael and his mother about his true identity, before meeting Dalia. Dalia rejects Zohan after he reveals he was formerly an Israeli counter-terror operative. He decides to leave Dalia and take on Phantom in a championship Hacky Sack game sponsored by Walbridge, but the match is cut short with sudden news of the Middle Eastern block being attacked, and he quickly leaves.
Zohan arrives and calms the Israelis and Palestinians, who each blame the other for the violence, while making peace with Salim. Phantom then appears and confronts Zohan, but Zohan refuses to fight. Dalia appears, revealing that she is Phantom's sister, and convinces her brother to cooperate with Zohan against the arsonists, revealed to be white supremacists hired by Walbridge to instigate an inter-ethnic riot so he can get his new mall in the aftermath.
As Zohan and Phantom work to save the block, the latter admits that he always wanted to be a shoe salesman rather than a terrorist. Although the white supremacists are defeated and Walbridge imprisoned, Phantom accidentally destroys all of the shops on the block. However, with the Israelis and the Palestinians united, the block is transformed into a collectively-owned mall called the Peace and Brotherhood Fire Insurance Mall. Phantom opens a shoe store, Salim gets a new goat, which he gives children rides on, and Zohan and Dalia open a beauty salon, Zohan having married Dalia. Zohan's parents show up approving his new life before asking that he cut their hair, which he happily does.