WARNING: Contains nothing but spoilers
Picking up shortly after the previous film ended, Terror of Mechagodzilla begins with a submarine looking for the remains of Mechagodzilla off the coast of Okinawa. However, the submarine is soon attacked by a something underwater, and is destroyed. A salvaged recording of the last moments of the crew has the captain saying that they are under attack from a giant dinosaur. We are soon introduced to our main protagonists in this film: Interpol agent Murakoshi (played by Katsumasa Uchida) and marine biologist Akira Ichinose (played by Katsuhiko Sasaki. The main focus of much of the plot is Ichinose's interactions with Katsura Mafune (played by Tomoko Ai), the daughter of a Dr. Shinji Mafune (played by Akihiko Hirata), a once-famous scientist who was ridiculed by the scientific community decades earlier for believing that there was a dinosaur living underwater near Japan, which he named Titanosaurus. Initially, Ichinose and Murakoshi visited the home of the doctor to see him. However, they are informed by Katsura that he is dead and that she destroyed his work after he died. When she presses them for info about their visit, they tell her that her father's research may be connected to the destruction of the submarine.
However, all is not as it seems, for Dr. Mafune is still very much alive, and he is working alongside the Simians, who saved his daughter's life when she was fatally injured during an experiment, and so he works with them out of gratitude. The Simians have also, with the doctor's knowledge, converted Katsura into a cyborg capable of controlling both Titanosaurus and the reconstructed Mechagodzilla. Katsura helps Ichinose with some of her father's surviving research, and the two grow close to each other.
Soon, another submarine encounters Titanosaurus, but this time the submarine escapes when its sonar incapacitates the monster. Armed with this knowledge, Interpol begins constructing a sonar device to use against the monster should it attack land. Ichinose tells Katsura abotu this weakness. Soon, Dr. Mafune launches a premature attack on Tokyo with Titanosaurus. Before they can defend against the dinsoaur, it is discovered that the sonar device has been sabotaged. Fortunately, Godzilla intervenes and faces off againt Titanosaurus. The battle is over when Katsura is injured and falls over a cliff, allowing Titanosaurus to break free of the mind control for a short while, heading back to the sea.
While Dr. Mafune is reprimanded for jumping the gun, Commander Mugan (played by Goro Mutsu) sees this as an opportunity. He knows that Mechagodzilla cannot beat Godzilla alone, but hopes that the interference of Titanosaurus will weaken Godzilla enough to turn the tide in the robot's favor. Katsura has been rescued from the brink of death yet again, but now she is under the near-full control of the Simians. Ichinose, believing that Katsura had died earlier after Titanosaurus's attack, goes to her home to pay his respects to both her and her father; however, he is captured by the Simians and is soon introduced to a very much alive Shinji and Katsura Mafune. Ichinose is baffled by the scientist's decision to side with the Simians, who have setup a small control center in Mafune's lab, away from their base. Ichinose tries to change the doctor's and Katsura's minds, but neither will listen to him.
Meanwhile, Interpol has discovered the location of the Simians' base of operations, where the repaired Mechagodzilla is being held. When Interpol launches it's attack, Mechagodzilla has already been launched, and the police discover that the only people inside of the base are the human slaves that have been captured and tortured by the aliens, and that the base itself has been set for self-destruct by the Simians, who anticipated their arrival. The base is destroyed after the Interpol agents and the freed slaves escape.
The Simians and Dr. Mafune launch their final assault on Tokyo, with Titanosaurus and Mechagodzilla reducing much of the city to rubble. Godzilla soon appears, but he is overwhelmed by the combined might of Titanosaurus and Mechagodzilla. Even with the help of the JSDF, Godzilla is still outmatched by the titanic duo. Things begin to seem bleak as Godzilla is incapacitated, but Interpol has managed to fix their sonar device, and they use it on Titanosaurus. As Mechagodzilla prepares to destroy the helicopter carrying the device, Godzilla revives and attacks the robot.
Despite his best efforts, Ichinose is still held captive by Dr. Mafune and the Simians. Fortunately, Murakoshi and some other Interpol agents have come to the rescue. Dr. Mafune is fatally wounded in the firefight and Katsura is injured. Most of the other Simians are killed. Mugan escapes and jumps into the ocean. Shortly afterwards, three flying saucers rise from the ocean, carrying the escaping Simians, which are then destroyed by Godzilla. Katsura, knowing that she houses Mechagodzilla's controls inside of her, commits suicide, and dies in Ichinose's arms. With Mechagodzilla now powerless, Godzilla destroys his mechanical double. Titanosaurus, now free from the mind-control, is barely aware of where he is, let alone looking to continue a fight he would never have started in the first place. A battle-weary Godzilla, ignorant of this fact, attacks again without hesitation and drives Titanosaurus into the sea, his final fate uncertain.
Shortly after the battle, Ichinose carries Katsura's lifeless body outside and the film ends as Godzilla returns to the sea.