Shrek, a mean-spirited and highly territorial green ogre who loves the solitude of his swamp, finds his life interrupted when he is befriended by a talkative Donkey, one of countless fairytale creatures exiled to Shrek's swamp by the fairytale-hating and vertically-challenged Lord Farquaad of Duloc. Angered by the intrusion, he decides to ask Farquaad to exile them elsewhere, bringing Donkey along as he is the only one willing to guide him to Duloc.

Meanwhile, Farquaad's torture of the Gingerbread Man for the location of the remaining fairytale creatures is interrupted when his guards present him with a Magic Mirror. He asks the Mirror if his kingdom is the fairest of them all but is told that he is not even a king, and that he must marry a princess. Farquaad resolves to marry Princess Fiona, who is locked in a castle tower guarded by a dragon. Unwilling to perform the task himself, he organizes a tournament wherein the winner gets the "privilege" of rescuing Fiona for him. Shrek and Donkey arrive during the tournament, and ignorantly defeat Farquaad's knights. Farquaad proclaims them the champions, and compels them under threat of death to rescue Fiona, promising to move the fairytale creatures from Shrek's swamp if he succeeds.

Shrek and Donkey travel to the castle to find Fiona. They are attacked by a Dragon, who corners Donkey. In desperation, he sweet-talks the beast, learning that it is female. Dragon falls in love with Donkey and carries him to her chambers. Meanwhile, Shrek finds Fiona, who is appalled at his lack of romanticism and surprised he had not slain Dragon. They leave after rescuing Donkey, and Fiona is thrilled to be rescued but is quickly disappointed when Shrek reveals he is an ogre. Despite her demands that Farquaad come get her in person, Shrek forcibly carries her as he ventures back to Duloc with Donkey. At night, Shrek explains to Donkey his frustration at how society judges him for how he looks; Fiona overhears this, and decides to be kind to Shrek. The three encounter Robin Hood on their way back, where it is revealed that Fiona is an expert martial artist. Shrek and Fiona find they have much in common and begin to fall in love.

When the trio is almost at Duloc, Fiona takes shelter in a windmill for the evening. Donkey hears strange noises from within and investigates, finding Fiona transformed into an ogress. Fiona reveals that she was cursed during childhood to transform every night, and that only her true love's kiss will change her to "love's true form". Meanwhile, Shrek is about to confess his feelings to Fiona, but then overhears part of their conversation and becomes upset after mistaking her calling herself an "ugly beast" as disgust towards him. At Donkey's suggestion, Fiona vows to tell Shrek about her curse, but sees that Shrek has brought Lord Farquaad to the windmill. Confused and hurt by Shrek's sudden cold disposition towards her, Fiona accepts Farquaad's marriage proposal and requests they be married before nightfall. The couple return to Duloc, while Shrek angrily abandons Donkey and returns to his now-vacated swamp. Angered, Donkey arrives at the swamp and confronts a still upset Shrek. Donkey explains that the "ugly beast" Fiona was referring to was someone else, and the two reconcile. Donkey urges Shrek to express his feelings for Fiona before she is married, and the two travel to Duloc quickly by riding Dragon, who had escaped her confines and followed Donkey.

Shrek interrupts the wedding before Farquaad can kiss Fiona; he tells her that Farquaad is not her true love and is only marrying her to become king. The sun sets, which turns Fiona into an ogress in front of everyone, causing a surprised Shrek to understand what he overheard. Outraged, Farquaad orders Shrek executed and Fiona detained. Dragon bursts in alongside Donkey and devours Farquaad alive. Shrek and Fiona profess their love and share a kiss, and Fiona's curse is lifted. While Fiona is surprised and disappointed to see that she is still an ogress despite the fact that she was supposed to become beautiful, Shrek states that she already is beautiful. They marry in the swamp and leave on their honeymoon.

Newlyweds Shrek and Fiona return from their honeymoon to find they have been invited by Fiona's parents to a royal ball to celebrate their marriage. Shrek refuses to go at first, but Fiona talks him into it, and along with Donkey, they travel to the kingdom of Far Far Away. They meet Fiona's parents, King Harold and Queen Lillian, who are shocked to see both their daughter and son-in-law are ogres, with Harold particularly repulsed. At dinner, Shrek and Harold get into a heated argument over how Shrek and Fiona will raise their family, and Fiona, disgusted at Shrek and Harold's behavior, locks herself away in her room that evening. Shrek worries that he has lost his true love, particularly after finding her childhood diary and reading that she was once infatuated with Prince Charming.

Harold is reprimanded by the Fairy Godmother and her son Prince Charming by reminding him that Charming was to marry Fiona in exchange for his own happy ending. She implores him to find a way of getting rid of Shrek. Harold arranges for Shrek and Donkey to join him on a fictitious hunting trip, which is actually a trap to lure them into the hands of an assassin, Puss in Boots. Unable to defeat Shrek, Puss reveals that he was paid by Harold and offers to come along and make amends. The three sneak into the Fairy Godmother's potion factory by pretending to be representatives of a worker's union and steal a "Happily Ever After" potion that Shrek thinks will restore Fiona's love for him.

Shrek and Donkey both drink the potion and fall into a deep sleep, awakening the next morning to discover its effects: Shrek is now a handsome man while Donkey has turned into an elegant white stallion. In order to make the change permanent, Shrek must kiss Fiona by midnight. Shrek, Donkey, and Puss return to the castle to discover that the potion has transformed Fiona back into her former human self as well. However, the Fairy Godmother, having discovered the potion's theft, intercepts Shrek and sends Charming to pose as him and win Fiona's love. At the Fairy Godmother's urging, Shrek leaves the castle, believing that the best way to make Fiona happy is to let her go.

To ensure that Fiona falls in love with Charming, the Fairy Godmother gives Harold a love potion to put into Fiona's tea. This exchange is overheard by Shrek, Donkey, and Puss, who are arrested by the royal guards and thrown into a dungeon. While the royal ball begins, several of Shrek's friends band together to free the trio with the help of The Muffin Man's monster-sized gingerbread man, which breaks through the castle's defenses. Shrek is too late to prevent Charming from kissing Fiona, but instead of falling in love with Charming, Fiona knocks him out with a headbutt. Harold reveals that he never gave Fiona the love potion, whereupon the now-enraged Fairy Godmother attacks Shrek. In the ensuing melee, Harold sacrifices himself to save Shrek; his armor ricochets a spell cast by the Fairy Godmother which disintegrates her, and Harold is turned back into the Frog Prince, his true form. Harold gives his blessing to the marriage and apologizes for his earlier behavior, admitting his use of the Happily Ever After potion years earlier to gain Lillian's love. Lillian assures Harold that she loves him over his appearance.

As the clock strikes midnight, Fiona rejects Shrek's offer to remain humans, and they happily let the potion's effects wear off and revert to their ogre forms, while Donkey changes back to his natural form as well. In the mid-credits scene, Dragon, who had previously romanced Donkey, reveals that they now have several dragon-donkey hybrid babies, much to his surprise.

After a failed performance at a dinner theater, Prince Charming vows to himself that he will become King of Far Far Away and avenge the death of his mother, the Fairy Godmother. Meanwhile, King Harold is sick so Shrek and Princess Fiona are the Regents, but their attempts end in disaster. That night, Fiona discusses to Shrek about starting a family, which he disagrees. They find out that Harold is dying and Shrek and Fiona are the next in line to rule. Shrek insists that an ogre as king and a ogress as lady-in waiting is a bad idea and that there must be someone else to rule the kingdom. Before he dies, Harold tells Shrek of another heir: his nephew, Arthur "Artie" Pendragon. Charming goes to the Poison Apple tavern and persuades fairy tale villains to fight for their "happily ever after".

Shrek, Donkey and Puss in Boots set out to retrieve Artie; as they are sailing away, Fiona reveals to Shrek that she is pregnant, much to Shrek's horror, as he believes he is not capable of raising children. The trio journey to Worcestershire Academy, an elite magical boarding school, where they discover Artie is a scrawny 16-year-old underachiever. At the school pep rally, Shrek tells Artie he will be king of Far Far Away. Artie is excited until Donkey and Puss inadvertently frighten him by discussing the responsibilities of being king. Immediately losing confidence in being king, Artie tries taking control of the ship to go back to Worcestershire, and as he and Shrek fight over the steering wheel, it breaks and the ship crashes on a remote island, where they encounter Arties retired wizard teacher, Merlin.

Charming and other villains attack the castle, but Wolf, Pinocchio, Gingy, the Three Little Pigs and the Blind Mice stall them long enough for Fiona and her mother Queen Lillian to escape along with Snow White, Rapunzel, Cinderella, Sleeping Beauty and Doris the Ugly Stepsister. One of the Pigs accidentally blurts out that Shrek has gone to retrieve Arthur, and Prince Charming sends Captain Hook and his pirates to track down Shrek. The ladies are put in a tower after Rapunzel betrays them, having fallen in love with Charming.

Captain Hook and his pirates track Shrek and his friends to Merlin's island, where they attempt to capture Shrek. Shrek defeats the villains, and Hook mentions Charming and the takeover of Far Far Away. Shrek urges Artie to return to Worcestershire. Instead, Artie cons Merlin into using his magic to send them to Far Far Away. The spell causes Puss and Donkey to accidentally switch bodies. They find Pinocchio and learn that Charming plans to kill Shrek as part of a play. Charming's men arrive, but Artie tricks the knights into not taking them into custody and they break into the castle during rehearsals for the play. Caught in Charming's dressing room, the four are taken captive.

Charming prepares to kill Artie, believing he is the next king. To save Artie's life, Shrek tells Charming that Artie was a pawn to take his place as King of Far Far Away. Charming believes Shrek and allows Artie to leave. Donkey and Puss are imprisoned with Fiona and the ladies, where Fiona grows frustrated with their lack of initiative. Fiona's mother, Queen Lillian, smashes an opening in the stone wall of the prison with a headbutt. While the princesses launch a rescue mission for Shrek, Donkey and Puss free Gingy, Pinocchio, the Wolf and pigs, and Dragon and Donkey's children. They encounter Artie; Puss and Donkey mollify him by explaining that Shrek lied to save Artie's life.

Charming stages a musical in front of the kingdom. Just as Charming is about to kill Shrek, Fiona, along with Puss and Donkey, the princesses and the fairy tale characters confront the villains. They lose: Donkey and Puss are held by Cyclops, the pigs are kidnapped by henchmen, Gingy is held hostage by knights, Dragon is surrounded by guards and Fiona is tied up. Artie shows up and convinces the villains that being treated like losers does not mean they must be losers. The villains agree to give up their evil ways, while Charming refuses to listen and lunges at Artie with his sword, but Shrek blocks the blow, so Charming attacks him instead. As Shrek pushes Charming aside, Dragon knocks over Rapunzel's tower, trapping him inside.

Artie is then crowned king. While the kingdom celebrates, Merlin restores Puss and Donkey to their correct bodies (only for their tails to be on the wrong body), and Shrek and Fiona return to their swamp, where they become the parents of ogre triplets and cope with the help of Puss, Lillian, Donkey and Dragon.

In a flashback, King Harold and Queen Lillian are about to sign the kingdom of Far Far Away over to "Rumpel" Rumpelstiltskin, in exchange for lifting their daughter's curse. The deal is canceled at the last second when a knight informs the King and Queen that Princess Fiona has been rescued by Shrek. An angry Rumpelstiltskin laments his loss and wishes Shrek was never born.

In the present time, Shrek has grown steadily weary of being a family man and celebrity among the local villagers, leading him to wish for when he felt like a "real ogre" again. When he takes his family to Far Far Away to celebrate his children's first birthday, an escalating series of mishaps further injure his ego, causing him to lose his temper and walk out in anger.

Shrek encounters Rumpel, who sees his chance, having observed Shrek's angry outburst. He follows Shrek and arranges for him to appear to save his life. He gives Shrek a day to live like a real ogre, in exchange for a day from his childhood that he would not remember being erased to "thank" him. Shrek was tricked by Rumpelstiltskin into signing the contract and suddenly was taken to an alternate universe where the events starting from the first film onward never happened. Now feared by the villagers, Shrek takes the opportunity to cause some lighthearted mischief until he learns that Fiona is a fugitive, and his swamp is deserted and desolate. He is kidnapped by witches and taken to Rumpel, now the King of Far Far Away, which has become derelict.

Rumpel reveals that he erased the day that Shrek was born. Therefore, Shrek does not exist, and the King and Queen signed their kingdom over to Rumpelstiltskin, making them disappear. When the day ends, Shrek will disappear as well. Shrek escapes Rumpel's castle with Donkey. Initially terrified of Shrek, Donkey decides to trust him after seeing Shrek cry over his erased history, something he had never seen an ogre do before. Donkey helps him find a hidden exit clause: the contract can be nullified by "true love's kiss".

They soon encounter an army of ogres who are resisting Rumpel, led by a still-cursed Fiona, who keeps Puss in Boots as a lazy, overweight pet. Shrek does everything he can to gain Fiona's love, but she is cynical and disillusioned about the power of true love after no one came to rescue her and is too busy preparing an ambush on Rumpel. While sparring with her, Fiona begins to take a liking to Shrek but stops short of kissing him. Puss encourages him to continue pursuing Fiona.

During the ambush, the ogres are captured by the Pied Piper, though Shrek and Fiona escape with the intervention of Puss and Donkey. Shrek insists Fiona kiss him, saying it will fix everything, but it does not work because Fiona does not truly love him. When he hears that Rumpel is offering a wish to the one who brings him Shrek, Shrek turns himself in and uses the wish to free the other ogres, who storm the castle, battle the witches, and capture Rumpel.

As the sun rises, Shrek begins to fade from existence, but Fiona, having fallen in love with him, kisses Shrek just before he disappears. As she does not transform in the sunlight, she realizes that her kiss with Shrek has broken her curse as she has assumed "love's true form". The alternate reality disintegrates and everyone else disappears as Rumpel is then attacked by vengeful spirits.

Shrek finds himself back at his children's birthday party at the time right before he lost his temper. Instead of lashing out, Shrek embraces everyone with a newfound appreciation for family and friends.