Set during the Sierra Leone Civil War in 1999, the film shows a country torn apart by the struggle between government soldiers and rebel forces. The film portrays many of the atrocities of that war, including the rebels' amputation of people's hands to stop them from voting in upcoming elections.

The film begins with the capture of Solomon Vandy (Djimon Hounsou), a Mende fisherman, by the Revolutionary United Front (RUF) rebels when they invade the small Sierra Leonian village of Shenge. Separated from his family, Solomon is enslaved to work in the diamond fields under the command of Captain Poison (David Harewood) while his son Dia is conscripted into the rebel forces, the brainwashing eventually turning him into a hardened killer. The RUF use the diamonds to fund their war effort, often trading them directly for arms. While working in the RUF diamond fields as a forced laborer, Solomon finds a large diamond of rare pink colouring. Moments before government troops launch an attack, Captain Poison sees Solomon hiding the diamond. Captain Poison is injured in the attack before he can get the stone, and both he and Solomon are taken to prison in Freetown, the capital of Sierra Leone.

Danny Archer (Leonardo DiCaprio), an Anglo ex-mercenary from Rhodesia (now Zimbabwe), trades arms for diamonds with an RUF commander. He is imprisoned after being caught smuggling the diamonds into neighboring Liberia, and the diamonds are confiscated. He had been transporting the diamonds to a South African mercenary named Colonel Coetzee (Arnold Vosloo), who is in turn employed by South African diamond company executive Van De Kaap (Marius Weyers) and his deputy Simmons (Michael Sheen). Coetzee is Archer's former commander in 32 Battalion, the most decorated unit of the South African Border War, made up of Angolan and Rhodesian soldiers and white South African officers. Archer is desperate for a way to repay Colonel Coetzee for the diamonds taken from him when he was arrested and thrown in jail, in the same prison as the fisherman. While in prison, he overhears Captain Poison ranting to Solomon about the discovery of the large diamond and decides to hunt down the stone. He arranges for Solomon's release from prison and offers to help him find his family in exchange for the diamond.

Archer and Solomon find their way to Maddy Bowen (Jennifer Connelly), an American journalist, who helps Solomon track down his family. Bowen soon learns that Archer is using Solomon to find his diamond and will eventually steal it for himself, to leave Africa forever. Bowen, a humanitarian, refuses to help Archer unless he can tell her about the diamond market to stop the flow of blood diamonds out of Africa, cutting off funding for Civil War and ending a mass revolution. Archer gives Bowen the information that she wants and gets access to use the press convoy to travel to Kono to find the diamond.

The convoy is attacked and Archer, Solomon and Bowen escape and find their way to the South African mercenary force under Colonel Coetzee. There they learn of the attack force preparing to retake Sierra Leone -- a reference to the actual 1995 hiring of South African security firm Executive Outcomes by the provisional government of Sierra Leone. The two men leave the camp on foot while Bowen boards a plane carrying foreigners out of the conflict zone. After an arduous overnight trek, the men reach the mining camp in a river valley, still under RUF control, where Solomon discovered and buried the large diamond. Here, Solomon is painfully reunited with his son Dia, who refuses to acknowledge him because he has been brainwashed by the rebels. Solomon is also reunited with Captain Poison, who orders him to find the diamond, but the South African mercenary force, also after the diamond, dispatches the RUF rebels in a massive air strike which kills many of the RUF rebels and some of the miners. Amist the choas, Solomon suffers from temporary insanity and kills Poison with a shovel. Through a deal with Archer, Colonel Coetzee forces Solomon to retrieve the stone. In a desperate battle, Archer kills Coetzee and the other two soldiers with him after realizing that they would have killed both Archer and Solomon upon locating the diamond. At this point Dia holds Archer and Solomon at gunpoint with a pistol, but Solomon manages to convince him to side with them.

As Archer overturns a body to take equipment he realizes he has been shot, but keeps this to himself. Having arranged in advance for a plane to pick him up, he radios to the pilot, Benjamin Kapanay (Basil Wallace), who demands that Archer dump Solomon and Dia. Slowly and painfully the group makes its way from the valley towards an airstrip atop a nearby ridge. Archer collapses, unable to climb, and Solomon carries him a little ways before Archer has him put him down. He tells Solomon to take Dia home, knowing that he is dying, and gives them the diamond. Archer holds off the soldiers chasing them while Solomon and Dia flee, and then makes a final phone call to Bowen, asking her to help Solomon as a last favor before looking out over the beautiful landscape of Africa once more and dying peacefully.

With the help of Bowen, Solomon trades the diamond to Simmons for a large sum of money and the reunification of his family, making the exchange as Solomon's wife and children deplane from a Lear Jet at a London airport. Bowen, who secretly photographs the deal, later publishes a magazine piece exposing the trade in "conflict" or "blood" diamonds. The film ends with Solomon smiling at the photograph Maddy took of Archer earlier, now published in her magazine along with the complete story of their journey, before addressing a conference on blood diamonds in Kimberley, South Africa, describing his experiences. This refers to an actual meeting that took place in Kimberley in 2000 and led to the Kimberley Process Certification Scheme, which seeks to certify the origin of diamonds in order to curb the trade in conflict diamonds.