Walter, a puppet, lives with his brother Gary (Jason Segel), a human, in Smalltown. The two became Muppet fans when they watched The Muppet Show in their youths. As adults, Walter and Gary continue to live together in their home town of Smalltown. Gary plans a vacation to Los Angeles with his girlfriend Mary (Amy Adams) to celebrate their tenth anniversary, and he invites Walter along so he can see the Muppet Theater. Gary is pleased to spend time with both Mary and Walter ("Life's a Happy Song"), though Mary feels that Gary's devotion to Walter detracts from their relationship.
In Los Angeles, the three visit the Muppet Theater to find it in ruins. During the tour around the facility, Walter sneaks into Kermit the Frog's office and discovers Statler and Waldorf selling the theatre to Tex Richman (Chris Cooper), an oil magnate, and his associates Bobo the Bear and Uncle Deadly. Waldorf explains that the Muppets can raise 10 million dollars to re-buy the theater in a certain amount of days. Once Statler and Waldorf leave, Walter learns of Tex's true intentions: to tear down the Muppet Studios and drill underneath for oil.
Walter explains the situation to Gary and Mary, and the three track down Kermit at his mansion. Kermit is distressed to learn the news, and realizes the only way to earn the ten million dollars would be to put on a show, which the Muppets have not done in years ("Pictures In My Head"). Walter convinces him to try anyway, and they set off to reunite the group. Fozzie Bear is performing with a group of uncouth Muppet impersonators, the Moopets, in Reno, Nevada, and Kermit persuades him to leave the group. Gonzo has become a powerful plumbing magnate. He at first refuses, but secretly longs to return to his daredevil days; he then blows up his business and joins them. Animal is in a celebrity anger-management clinic; he rejoins them, but his sponsor, Jack Black, warns him to avoid drums. During a montage, the rest of the Muppets are found and picked up. They then travel to Paris to find Miss Piggy, who went to work as Vogue Paris' editor in chief. They try to ask her to come, but she refuses to cooperate. The Muppets replace Piggy with her Moopet counterpart, Miss Poogy.
The Muppets pitch their idea for a telethon and are rejected by several TV networks. One executive, Veronica (Rashida Jones), accepts an offer to give the Muppets a 2-hour opening in her network's schedule, due to the sudden cancellation of one of the network's hit shows, however, on the condition that they bring in a celebrity guest. The Muppets repair the theater ("We Built This City"), but their rehearsal does not go well and Kermit is unable to find a celebrity guest. Miss Piggy returns and kicks Miss Poogy out. Kermit persuades Walter to help them out and find his talent.
Soon realizing they have not found a guest host, Kermit asks Tex to give their studio back, but he refuses ("Let's Talk About Me"). He further reveals that the Muppets will also lose their rights to the Muppet name; it will be given to the Moopets, who have allied with Tex. Miss Piggy then organizes the Muppets, sans Kermit, to kidnap Black to serve as their celebrity host. Mary returns to Smalltown after Gary forgets the promised anniversary dinner. Gary and Walter each want the other's help with their problems, and they have a falling out. Gary realizes that he needs to step up in his relationship with Mary, while Walter realizes he was meant to be a Muppet ("Man or Muppet"). Gary returns to have dinner with Mary and they watch the telethon, which goes well with celebrity support and Black as host. Tex cuts the power to the theater, but Gary and Mary rush back to Los Angeles and repair the wiring so the telethon can continue. Uncle Deadly turns on Tex and stops him from destroying the transmitter antenna.
With the telethon running short, Walter finds his talent by performing a whistling act to the audience's acclaim. The tote board stops at $9,999,999 after Tex destroys the nearby telephone pole. A glitch discovered when Fozzie bangs his head on the tote board then reveals the total donations were actually only $99,999.99, nowhere near the amount of money needed. Kermit states that they tried and that is all that matters. Together again as a family, they will start over. When the Muppets, along with Walter, Gary, and Mary, walk out of the theater, they discover a huge gathering of fans and press. With Gary's encouragement, Walter joins the Muppets as they greet the crowd ("Life's a Happy Song"). Gary proposes to Mary, Black is taken and declared king of the hobos by Hobo Joe (Zack Galifianakis) and Friends, and Tex returns the theater and the Muppet name to the Muppets after Gonzo's failed "head-bowling" act from the telethon causes Tex a head injury, making him laugh for the first time in his life.