In 1991, Jeffrey "The Dude" Lebowski, a middle-aged bachelor with a penchant for cannabis and bowling, gets assaulted in his Los Angeles home by two goons hired by pornographer Jackie Treehorn, demanding money owed to him by the wife of another, wealthier Jeffrey Lebowski (the eponymous "Big Lebowski"). Realizing they have the wrong man, they leave, but not before one of them urinates on The Dude's rug.
The next day, The Dude tells of what happened to his friends and bowling partners, Theodore Donald "Donny" Kerabatsos and Vietnam veteran Walter Sobchak. The Dude seeks compensation from the other Lebowski, a cantankerous and wheelchair-bound philanthropist. His request is refused, but The Dude takes a valuable rug from the mansion on his way out after telling Brandt, Lebowski's sycophantic assistant, that Mr. Lebowski had said he could take any rug in the house. Upon his departure, The Dude also meets Bunny, Lebowski's young trophy wife.
A few days later, The Dude is told that Bunny has been kidnapped, and Lebowski wants The Dude to deliver a briefcase containing ransom money and perhaps recognize the culprits. Brandt, the Big Lebowski's butler, insists upon telling the Dude that "Bunny's life is in your hands." Later that night, another pair of thugs appear at The Dude's apartment, knock him unconscious and take his new rug.
When the kidnappers call, Walter comes along intent on giving them another briefcase (filled with Walter's "dirty undies") so that he and The Dude can keep the ransom money for themselves. When they arrive at the meeting location, Walter throws out his briefcase which is quickly intercepted by the kidnappers, who leave quickly on motorcycles. Later that night, after another game of bowling, The Dude's car is stolen with the real briefcase still inside.
Lebowski's adult daughter Maude then calls, revealing that she took the rug and asking The Dude to visit her. She plays a pornographic video for him showing Bunny to be one of Treehorn's actresses. She thinks Bunny staged her own abduction and asks The Dude to recover the ransom which her father withdrew from the family's personal foundation. Shortly thereafter, The Dude is confronted by Lebowski. Angry that The Dude failed to deliver the ransom money, he shows him a severed toe, presumed to be Bunny's. Later, three German nihilists invade The Dude's apartment and threaten him, identifying themselves as the kidnappers. Maude says the nihilists are actually Bunny's friends.
The next day, The Dude's car is found by the police, minus the briefcase. Later, while cruising in the car, The Dude finds the homework of a high school student named Larry Sellars on his seat. Walter and The Dude go to the Sellars' house that evening and repeatedly demand that Larry confess to having stolen the money, but he does not respond, so Walter uses a crowbar to wreck a new sports car parked outside the house which he believes Larry bought with the money. However, the real owner of the car then rushes outside and wrecks The Dude's car in revenge, thinking it to be Walter's.
Shortly thereafter, The Dude is forcefully taken before Treehorn by his goons. Treehorn asks about the whereabouts of Bunny and the money she owes him. Treehorn then drugs the Dude's white Russian cocktail, causing him to have a dream about starring in a Treehorn film about bowling with Maude. He awakes in police custody where he is assaulted by the Malibu police chief. On the ride home, after being kicked out of a cab, The Dude is unknowingly passed by a sports car driven by Bunny, who is revealed to still have all of her toes. The Dude returns home, only to find his bungalow ransacked by Treehorn's goons. He is greeted by Maude, who seduces him, specifically to conceive a child; The Dude objects until Maude states that she wishes him to have no involvement in the child's upbringing. She also explains that her father has no money of his own, his wife having left everything to the family charity.
Having had an epiphany, The Dude has Walter drive him back to the Lebowski estate where they find Bunny's crashed car, but she is otherwise safe. It becomes evident to the characters that when Bunny willingly left town on an unannounced trip for a few days, her friends (the German nihilists) faked a kidnapping so they could extort money from Lebowski. When Lebowski, who hated his wife, heard of the supposed kidnapping, he withdrew the money from the foundation, kept it for himself and actually gave The Dude a briefcase containing only a couple of phone books. Walter and The Dude confront Lebowski, who refuses to admit responsibility, and Walter throws him out of his wheelchair, thinking he is also faking his paralysis.
The Dude and his friends then return to the bowling alley, assuming the ordeal is over, only to be confronted in the parking lot by the nihilists, who have set The Dude's car on fire. They once again demand the ransom money. Learning there never was any money, they try to rob them anyway, but Walter violently beats all three of them. However, during the scuffle, Donny suffers a fatal heart attack.
A few days later, Walter and The Dude go to the beach to scatter Donny's ashes. Walter delivers an informal eulogy which he turns into a tribute to the Vietnam War, and accidentally covers The Dude with Donny's ashes after misjudging the wind. The Dude is initially angry with Walter, but gets over it and they go bowling. At the bowling alley, the film's cowboy narrator states that Maude is pregnant with a "little Lebowski" and expresses his hope that The Dude and Walter will win their upcoming bowling tournament.