As people from near and far are arriving in Agrabah it's revealed that they have come to celebrate a magnificent celebration; The wedding of Aladdin and Princess Jasmine. Everyone is getting ready for the big event and they all express their excitement to the occasion, but the Sultan discovers that the groom is no where to be found. Aladdin is revealed to be at his old hovel, where he recovers a dagger, the only memento of he has of his lost father, who had died when Aladdin had been a small child. Aladdin reveals to Genie that he is worried as to what kind of father he will be in the future since his father was never around, but Genie reassures him and they head to the palace for the wedding.
Meanwhile, unknown to the guests or guards, the legendary Forty Thieves and their leader the King of Thieves, have sneaked into the Agrabah to raid the wedding, while at the same time to steal a particular piece of treasure. The ceremony begins and it starts off beautifully, as Aladdin and Jasmine are about to say their vows to each other, the ceremony is interrupted by the Forty Thieves who start to steal treasures from all the guests. While Jasmine, Abu, Carpet, and Genie fight out the thieves, Aladdin faces off against the King of Thieves, who is trying to steal a particular wedding gift from Aladdin and Jasmine: a scepter.
Aladdin, Jasmine and the rest of their gang successfully stop the raid and drive the thieves away, however the wedding must now be postponed as the wedding pavilion needs to be rebuilt due to the Thieves' attack. Aladdin and company are wondering what the thieves were after, but Aladdin confirms that they were after an unusual staff among the treasures given as wedding presents. When Iago asks why out of all the gifts would the Forty Thieves be after a staff, it suddenly lifts up into the air and reveals to contain an oracle, able to see into the past or the future, but is only able to grant an answer to one question asked per person.
Overcome with desire to know more about his family, Aladdin starts to wonder about his past, in order to get the answers he needs. The oracle reveals, much to his shock and surprise, that his father is alive. At his hovel, Aladdin reflects over the recent news and reveals to Jasmine his conflicting thoughts over whether or not he should learn about his father, since he had abandoned him as a child. Jasmine encourages Aladdn to learn more about him and asks the oracle about his long-lost father, and is told to follow the trail of the Forty Thieves, stating that Aladdin's father is "trapped within their world". Believing him to be their prisoner, Aladdin tracks them down and stows away into their hideout. He is shocked to find that his father is not their prisoner at all, but their leader: Cassim, the King of Thieves, the very man he fought during his wedding's invasion. But, family or not, Aladdin has trespassed in their lair and the Forty Thieves are eager to have him punished for it. Cassim, however, suggest that Aladdin instead face "the Challenge" - an initiation ritual - where he must defeat another one of the Forty Thieves and take his place. Aladdin eventually defeats Cassim's right-hand man, Sa'Luk, in battle, gaining him a place among the thieves. It is then that he learns the true motives behind the raid, and his father's leave of absence from his family: he had discovered evidence of the existence of the Hand of Midas, a powerful artifact that can transform anything it touches into solid gold. Cassim believed that, with the Hand, he could return to his family and give them the life they deserved instead of one living out in the streets, and had instigated the raid so he could capture the oracle's staff so he may question the seer as to the precise whereabouts of the artifact.
Aladdin convinces Cassim to come back with him to the Palace as his guest and, for a while, he is happy to spend quality time with his son. But the pull of his obsession with the Hand is too great, and he ends up stealing the Oracle's staff and getting captured by the guards of the palace. Aladdin helps his father escape, but is recognized by the Captain of the Guard, forcing him to flee the city with Cassim and Iago, Aladdin's treasure-loving parrot. Rather than abandon Jasmine (like his father had left him), Aladdin angrily confronts Cassim and returns to Agrabah to take responsibility for his actions. Meanwhile, Iago and Cassim return to the thieves' cave to find that Sa'Luk is still alive and is now the leader of the remaining thieves. Sa'Luk convinces the remaining thieves that Cassim sold them out to the palace guards and was to blame for the recent raid upon their hidden fortress (in actuality, it was Sa'Luk who told the guards so he could frame Cassim). Cassim, desperate to prove his loyalty, is forced to use the stolen oracle in order to find the location of the Hand, and then lead his men there. The Oracle directs them to The Vanishing Isle, a great marble fortress built on the back of a gigantic undersea turtle that periodically dives to the bottom of the ocean, taking the golden Hand with it.
Iago manages to escape from the group, and goes off to lead Aladdin and Jasmine to his imprisoned father. Aladdin and Cassim reconcile, and retrieve the Hand just as the turtle is beginning to submerge when they are attacked by Sa'Luk. Then, after struggling to escape the flooding fortress, Cassim throws the Hand of Midas to Sa'Luk, who doesn't know the legend of the Hand. Foolishly grabbing it by the gold hand (instead of the bronze handle), Sa'Luk is turned into gold. Aladdin and Cassim manage to escape with the Hand but, finally realizing how much pain his obsession with the trinket had caused, Cassim decides to toss it into the sea. However, it does not hit the sea just instantly. It hits the thieves' ship instead, turning it gold, and it sinks. As the movie closes, Aladdin and Jasmine finally tie the knot, and Cassim accepts the parrot Iago as a traveling companion as he goes off once again to see the world.
A reprise of Arabian Nights is then sung; the Peddler makes an appearance at the end of this film to mark the end of the legend of Aladdin (originally planned for the end of the first film) as Aladdin and Jasmine fly past him and wave good-bye to Cassim and Iago, and the two kiss.
- Aladdin, voiced by Scott Weinger. Brad Kane provides his singing voice.
- Genie and The Peddler, voiced by Robin Williams
- Cassim, voiced by John Rhys-Davies
- Jasmine, voiced by Linda Larkin. Liz Callaway provides her singing voice.
- Iago, voiced by Gilbert Gottfried
- Sa'Luk, voiced by Jerry Orbach
- Abu, voiced by Frank Welker
- The Sultan, voiced by Val Bettin
- The Oracle, voiced by C. C. H. Pounder
- Razoul, voiced by Jim Cummings