Set during a cold winter in a snow-covered forest during an undeterminate year of the Medivel times, Valerie (Amanda Seyfried) is a young woman living in the small village of Daggerhorn. She is in love with the woodcutter Peter (Shiloh Fernandez), but her parents Cesaire (Billy Burke) and Suzette (Virginia Madsen) have promised wealthy blacksmith Adrian Lazar (Michael Shanks) that Valerie will marry his son Henry (Max Irons) hoping Valerie will marry into wealth so she and they can live off Lazar's money.
Valerie plans to run away with Peter, but their plans are put on hold when the town sirens erupt, telling the couple that the werewolf who terrorizes their village has struck again. On closer inspection of the victim (found among a field of haystacks), it is found to be Lucy, Valerie's older sister. The townspeople offer a monthly sacrifice to the beast and stay away from the woods but Lucy ventured there after discovering that Valerie had been promised in engagement to Henry, whom Lucy loved.
Adrian, Henry, Peter, Cesaire, and the other men venture out into the woods to a mountain cave hunt the Wolf and manage to behead one, but it kills Adrian in the process. The men bring back a common gray wolf, thinking it is the one that has been terrorizing the village.
While helping Suzette embalm Adrian's body, Valerie discovers that Suzette and Adrian once had an affair and that Lucy is actually his daughter as well as Henry's half-sister. This is the reason why she could not be offered to him. Valerie also learns that Cesaire is seemingly unaware of this.
The townspeople decide to celebrate the death of the wolf, but their preparations are interrupted by the arrival of famous witch hunter Father Solomon (Gary Oldman), who reveals that the townspeople did not slaughter the real Wolf because it would have changed back into its human form if they did. Still, the townspeople decide to celebrate. But the festivities are interrupted by the arrival of the real Wolf, who in a rampage kills several people. Valerie and her friend Roxanne (Shauna Kain) are cornered by the Wolf while attempting to get to the safety of the church's hallowed ground. The Wolf then begins growling at Valerie and Roxanne; much to her surprise, Valerie is able to understand the Wolf, and gazing into its deep brown eyes, is able to communicate with it, as her friend looks on in terror.
When the two arrive back at the village it is shown that one of Father Solomon's guard is still alive, though he has been bitten by the Wolf. Father Solomon explains that those bitten by the creature during the week of a blood moon receive the curse as well and, despite the protests of the guard's brother, kills the guard in an attempt to save the town from yet another werewolf.
The following day, Father Solomon arrests Roxanne's autistic brother, believing him to be an accomplice of the Wolf because of his behaviour during and after the attack. Father Solomon has him tortured for regusing to name the beast. Roxanne negotiates for her brother's release by telling the priest that Valerie can communicate with the Wolf, but when led to her brother, finds him already dead.
Meanwhile, Father Solomon captures Valerie and uses her as bait that to lure the Wolf from hiding, but she is rescued by Peter and Henry. While Henry frees Valerie's arms from some chains, Peter sets afire the tower from which Father Solomon is overseeing the action. In the act Peter is caught and imprisoned. Father Solomon's men attempt to shoot the fleeing Valerie and Henry with crossbow bolts and in the ensuing mayhem the Wolf appears, killing many more and following Valerie to the church, where it burns its paw attempting to enter. Father Solomon, who steps out of the church courtyard as he tries to kill the Wolf, gets his hand bitten off. Roxanne and the other women shield Valerie from the wolf until the sun rises, while Father Solomon, wolfbitten and cursed, is executed by his vengeful chief guard.
Meanwhile, Valerie has a dream and becomes convinced that her Grandmother (Julie Christie) who lives in a cabin in the woods near the village and also has very brown eyes, is the Wolf and sets out to destroy her and save the village.
Valerie sets off for her grandmother's house, stopping at the chapel on her way out of the village, and putting Father Solomon's severed hand in her basket. In the woods, Valerie meets Peter, who is wearing a glove. He does not explain how he was able to get out of the elephant, but believing him to be the Wolf attempting to hide his burned paw, Valerie slashes him with a knife. She flees to her grandmother's house.
When Valerie arrives, it seems as though her grandmother is acting strangely, hiding in her curtained bedchamber while she talks to her granddaughter. It is then revealed that the Wolf was neither Peter nor Valerie's grandmother, but her father Cesaire: he pulls back the curtains and sstrides into the main room. Cesaire explains to Valerie that he needs someone to whom he can pass on his gift, as the blood moon is almost over. He explains that he originally intended for it to be Lucy, however once she saw him, she remained frightened; revealing that she could not understand him. Any offspring of a Wolf would have been able to understand its language. Upon this revelation, Cesaire acted out of rage and killed Lucy.
As Cesaire is about to bite Valerie, Peter arrives to save her. Cesaire bites Peter in the ensuing struggle, but is killed by Valerie's stab to the gut after Peter's axe to his back. Valerie and Peter dispose of Cesaire's body by filling him with rocks and dumping him into the water of a nearby lake.
Valerie chooses to remain living in her grandmother's house. She intends to wait for Peter, who, fully aware that he is cursed, retreats to the wilderness in order to learn how to control his power. A couple of years later, as Valerie picks some plants, she hears a sound. Looking up, she sees the Wolf, Peter now. She smiles as they reunite. The final shots are of Valerie in the red cloak walking on a snow-capped mountain with Peter.