"Halloween Town" is a dream world inhabited by deformed monsters, ghosts, ghouls, goblins, vampires, werewolves, and witches. Jack Skellington, also called "the Pumpkin King", leads them in a celebration of the macabre every Halloween, but has grown tired of its repetition. Wandering in the forest outside the town center, he accidentally opens a portal to "Christmas Town". Impressed by the feeling and style of Christmas, Jack presents his findings and his (somewhat limited) understanding of the holiday to the Halloween Town residents. They fail to grasp his meaning and compare everything he says to their idea of Halloween. He reluctantly plays along with them and announces that they will annexe Christmas.

Jack's obsession with Christmas leads him to usurp the role of Santa Claus. Every resident is assigned a task, while Sally, a rag doll created by the town's mad scientist, who is enamoured of Jack, alone fears that his plans will become disastrous. Jack assigns Lock, Shock, and Barrel, a trio of mischievous children, to abduct Santa and bring him back to Halloween Town. Against Jack's wishes and largely for their amusement, the trio deliver Santa to Oogie Boogie, a gambling-addict bogeyman who plots to play a game with Santa's life as the stake.

Christmas Eve arrives and Sally attempts to stop Jack, but he embarks into the sky on a coffin-like sleigh pulled by skeletal reindeer, guided by the glowing nose of his ghost dog Zero. He begins to deliver presents to children around the world, but the gifts (shrunken heads, Christmas tree-eating snakes, etc.) only terrify the recipients. Jack is believed to be an imposter attempting to imitate Santa, and the military goes on alert to destroy him. The sleigh is shot down and Jack is presumed dead by Halloween Town's citizens, but has survived the crash. Although he is depressed by the failure of his plan, he quickly regains his enthusiasm, deciding to use his imagination to revitalize Halloween rather than invade Christmas. He then rushes to rescue Santa and compensate for the damage he (Jack) has caused.

Meanwhile, Sally attempts to free Santa but is captured by Oogie. Jack slips into the lair and frees them, confronts Oogie, and unravels the latter's outer covering to spill the insects whereof Oogie is composed. Having been freed, Santa reprimands Jack before setting off to deliver presents to the world's children. He makes snow fall over Halloween Town to make peace between himself and Jack; the townspeople are confused by the snow at first, but soon begin to play happily in it. Jack and Sally share a kiss under the full moon, while Zero watches. This concludes the film.