The film opens with Jiminy Cricket telling a story of a wish coming true. In a workshop, Geppeto, a woodworker, finishes a wooden puppet, which he names Pinocchio. As Jiminy visits the workshop, Geppeto wishes upon a star that Pinocchio could become a real boy before falling asleep. During the night, the star, appearing as the Blue Fairy, appears and brings Pinocchio to live, but he remains a puppet. The Blue Fairy tells Pinocchio that to become a real boy he must prove himself worthy and listen to his conscience. Pinocchio has no understanding of a conscience, so Jiminy is asked to act as Pinocchio's conscience, which he agrees to.
Pinocchio is sent to school, but has an encounter with a duo of con-men, Honest John Worthington and Gideon the Cat, who convince him to join Stromboli's puppet show. Pinocchio becomes Stromboli's star attraction. However, Stromboli locks Pinocchio in a bird cage when Pinocchio asks to leave. Jiminy arrives and fails to free Pinocchio, to which the Blue Fairy appears. Pinocchio lies to the Blue Fairy about disobeying Geppeto, but finds his nose growing with each lie. The Blue Fairy explains that his lie will only grow until it becomes as apparent as his nose. Pinocchio claims he will be good from now on and his freed by the Blue Fairy, but warned that she will not help him again.
Honest John and Gideon are intimidated by a coachman into assisting him in taking boys to Pleasure Island. The con-men trick Pinocchio into believing he is sick and that going to Pleasure Island will cure him. Upon arriving, Pinocchio befriends another boy, Lampwick, and he and the other boys misbehave repeatedly at the island. Jiminy, infuriated, storms off. However, he discovers that the island is cursed and that the boys will be transformed into donkeys and sent off to salt mines and circuses by the coachman. Jiminy returns to find that Lampwick has been transformed into a donkey and he and Pinocchio escape with Pinocchio only growing donkey ears and a tail.
Pinocchio and Jiminy finally return to the workshop, but discover via a letter from the Blue Fairy that Geppeto, his cat Figaro, and goldfish Cleo have been consumed by the whale Monstro while searching for Pinocchio. Pinocchio attempts to rescue Geppeto by jumping into the ocean, followed by Jiminy, but he too is swallowed by Monstro. Pinocchio, reunited with Geppeto, burns wood in Monstro's belly to make him sneeze, freeing them. However, Monstro gives chase and Pinocchio is killed getting Geppeto to safety in a cave. Geppeto and Jiminy mourn Pinocchio's demise, but the Blue Fairy appears and resurrects Pinocchio as a real boy, deciding his actions to be brave. Geppeto rejoices Pinocchio's transformation and Jiminy is awarded a gold badge that signifies him an official conscience.