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. Against Henry's protest, the group splits into two groups and Henry and his father are attacked. The others manage to behead the wolf, but it kills Adrian in the process. The men bring back the head of a common gray wolf, thinking it is the one that has been terrorizing the village.
Valerie sees Suzette crying over Adrian's body and confronts her. Suzette admits that she 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. Solomon knows this because he killed a Wolf and cut off its paw, which changed into the hand of his wife. Solomon also informs them that during a "blood moon" (when the red planet aligns with the moon), anyone who is bitten by the Wolf will become one.
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 human eyes, is able to communicate with it, as her friend looks on in terror. The Wolf says that they are the same, both killers, and tells Valerie they should run away from the village together.
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 kills the guard in an attempt to save the town from yet another werewolf.
Peter comes to Valerie at night and says that they must run away immediately, but she refuses. Valerie's mother has been scratched by the Wolf and is being tended over by her grandmother (Julie Christie). Valerie tells her grandmother that the Wolf spoke to her and chose not to kill her.
The following day, Henry tells Valerie that he saw her together with Peter. He is going to break off their engagement because he does not want to force her to marry him.
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 refusing to name the beast. Roxanne attempts to negotiate for her brother's release by offering money and sex. When that fails, she tells the priest that Valerie can communicate with the Wolf. When confronted, Valerie admits that the Wolf spoke to her. When Valerie can not tell them who the Wolf is, Solomon arrests her to use her as bait to lure the Wolf from hiding. Peter and Henry agree to work together to track down the Wolf and save Valerie.
When Roxanne is brought to her brother, she finds him already dead.
Valerie's grandmother brings Valerie bread and a knife in prison. Valerie tells her that when Lucy found out about her engagement to Henry, she gave herself to the Wolf but her grandmother denies this.
Valerie's grandmother brings Henry some biscuits to thank him for speaking up in Valerie's defence. Then she accuses Henry of being Wolf, and says that Lucy followed him into the woods where he killed her. Henry then recognizes her smell from the night that his father was killed by the Wolf and accused her of being the Wolf.
Cesaire is imprisoned to prevent him from interfering with the plan to lure the Wolf to Valerie. A mask is put on Valerie as she is marched through the village and tied up wearing the red cloak given to her by her grandmother. Peter and Henry launch their rescue. While Henry frees Valerie's arms from some chains, Peter sets afire the tower from which Father Solomon is overseeing the action. Peter is caught and imprisoned in the torture device which killed Roxanne's brother. Father Solomon's men chase the fleeing Valerie and Henry and Henry is shot with a crossbow. The Wolf appears and attacks Solomon and his men. He bites off Father Solomon's hand. Valerie agrees to go away with the Wolf if he promises to leave the village alone. Roxanne and the other women shield Valerie from the Wolf until the sun rises and he must run away. As it is the blood moon, Father Solomon is wolfbitten and cursed, and he is executed by his vengeful chief guard (who is the brother of the guard who was bitten and killed by Solomon).
Meanwhile, Valerie has a dream that her grandmother who lives in a cabin in the woods near the village and also has very brown eyes, is the Wolf. 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. Henry tells her that he is going after the wolf while its tracks are still fresh and informs her that Peter is missing. In the woods, Valerie meets Peter, who is wearing a glove. He says he escaped from the torture device, 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 strides into the main room. He has killed her grandmother. Cesaire explains to Valerie that he wanted to leave the village and go to the city. He wanted to bring someone to whom he can pass on his gift. 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. Therefore Cesaire realized that his wife had an affair and Lucy was not his daughter. Acting out of rage, Cesaire killed Lucy. Cesaire now wants Valerie to come with him and carry on the Wolf lineage.
As Cesaire is about to bite Valerie, Peter arrives to save her. Cesaire bites Peter in the ensuing struggle, but is killed by Valerie who stabs him with the nails of Solomon's hand which are made of silver. Valerie and Peter dispose of Cesaire's body by filling him with rocks and dumping him into a nearby lake. Peter, fully aware that he is cursed, retreats to the wilderness in order to learn how to control his power. Valerie tells him she will wait for him.
Valerie chooses to remain living in her grandmother's house. 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.