The story deals with a manuscript found among the papers of the late Francis Wayland Thurston, of Boston. In the text, Thurston recounts his discovery of notes left behind by his granduncle, George Gammell Angell, a prominent Professor of Semitic languages at Brown University in Providence, Rhode Island, who died suddenly in "the winter of 1926–27" after being "jostled by a nautical-looking negro".
The first chapter, The Horror in Clay, concerns a small bas-relief sculpture found among the papers, which the narrator describes: "My somewhat extravagant imagination yielded simultaneous pictures of an octopus, a dragon, and a human caricature.... A pulpy, tentacled head surmounted a grotesque and scaly body with rudimentary wings." The sculpture is the work of Henry Anthony Wilcox, a student at the Rhode Island School of Design who based the work on his delirious dreams of "great Cyclopean cities of titan blocks and sky-flung monoliths, all dripping with green ooze and sinister with latent horror." Wilcox frequently references the terms Cthulhu and R'lyeh, and Angell also discovers reports of "outre mental illnesses and outbreaks of group folly or mania" around the world (in New York City, "hysterical Levantines" mob police; in California, a Theosophist colony dons white robes to await a "glorious fulfillment").
The second chapter, The Tale of Inspector Legrasse, discusses the first time the Professor had heard the word "Cthulhu" and seen a similar image. At the 1908 meeting of the American Archaeological Society in St. Louis, Missouri, a New Orleans police official named John Raymond Legrasse asked the assembled antiquarians to identify a statuette composed of an unidentifiable greenish-black stone, that "had been captured some months before in the wooded swamps south of New Orleans during a raid on a supposed voodoo meeting." The idol resembles the Wilcox sculpture, and represented a "...thing, which seemed instinct with a fearsome and unnatural malignancy, was of a somewhat bloated corpulence, and squatted evilly on a rectangular block or pedestal covered with undecipherable characters".
On November 1, 1907, Legrasse had led a party of policemen in search of several women and children who disappeared from a squatter community. The police found the victims' "oddly marred" bodies being used in a ritual that centered around the statuette: almost 100 men – all of a "very low, mixed-blooded, and mentally aberrant type" – were "braying, bellowing, and writhing" and repeatedly chanting the phrase, "Ph'nglui mglw'nafh Cthulhu R'lyeh wgah'nagl fhtagn". After killing five of the participants and arresting 47 others, Legrasse interrogated the prisoners and learned "the central idea of their loathsome faith": "They worshipped, so they said, the Great Old Ones who lived ages before there were any men...and...formed a cult which had never died...hidden in distant wastes and dark places all over the world until the time when the great priest Cthulhu, from his dark house in the mighty city of R'lyeh under the waters, should rise and bring the earth again beneath his sway. Some day he would call, when the stars were ready, and the secret cult would always be waiting to liberate him.
The prisoners identified the statuette as "great Cthulhu", and translated the chanted phrase as "In his house at R'lyeh dead Cthulhu waits dreaming." One particularly talkative cultist, known as "old Castro", named the centre of the cult as Irem, the City of Pillars, in Arabia, and referenced a relevant passage in the text the Necronomicon: "That is not dead which can eternal lie, And with strange aeons even death may die".
One of the academics present at the meeting, William Channing Webb, a professor of anthropology at Princeton, states that on an 1860 expedition "high up on the West Greenland coast" he had encountered "a singular tribe or cult of degenerate Esquimaux whose religion, a curious form of devil-worship, chilled him with its deliberate bloodthirstiness and repulsiveness." Webb claimed that the Greenland cult had both the same chant and a similar "hideous" fetish. Thurston, the narrator, reflects that "My attitude was still one of absolute materialism, as I wish it still were."
The third chapter, The Madness from the Sea, concerns Thurston's own investigation into the cult. Thurston discovers an article dated April 18, 1925, from the Sydney Bulletin, an Australian newspaper. The article reported the discovery of a derelict ship in the Pacific Ocean with only one survivor – Norwegian sailor Gustaf Johansen, second mate on the schooner Emma, which sailed from Auckland, New Zealand. On March 22, the Emma apparently encountered a heavily armed yacht, the Alert, crewed by "a queer and evil-looking crew of Kanakas and half-castes" from Dunedin, New Zealand. Despite being attacked by the Alert without provocation, the crew of the Emma were able to kill the opposing crew, but lost their own ship in the battle. Commandeering the Alert, the surviving crew sailed on and the following day discovered an island in the vicinity of co-ordinates of 47°9′S 126°43′W – despite there being no charted islands in the area. With the exception of Johansen and another man, the remaining crew died on the island, but Johansen was apparently "queerly reticent" about the circumstances of their death.
Thurston realizes from the article that the crew of the Alert was connected to the Cthulhu Cult, and travels to New Zealand and then Australia, where at the Australian Museum he views a statue retrieved from the Alert with a "cuttlefish head, dragon body, scaly wings, and hieroglyphed pedestal". Travelling to Oslo, Norway, Thurston learns that Johansen died suddenly after an encounter with "two Lascar sailors". Johansen's widow provides Thurston with a manuscript written by her late husband that reveals the final fate of the crew of the Emma.
The uncharted island was described as "a coast-line of mingled mud, ooze, and weedy Cyclopean masonry which can be nothing less the tangible substance of earth's supreme terror – the nightmare corpse-city of R'lyeh." The crew also struggle to comprehend the non-Euclidian geometry of the city. When the sailors manage to open a "monstrously carven portal", they are confronted by a new horror: "It lumbered slobberingly into sight and gropingly squeezed Its gelatinous green immensity through the black doorway.... The stars were right again, and what an age-old cult had failed to do by design, a band of innocent sailors had done by accident. After vigintillions of years great Cthulhu was loose again, and ravening for delight."
Johansen describes Cthulhu as "a mountain [who] walked or stumbled..." and flees with the crew, almost all of whom are killed by the creature or fall to their death in the heights of the strange city. Johansen and one crewmate return to the yacht and set sail, but note with horror that Cthulhu has entered the water to pursue the vessel. Johansen turns the Alert and rams the creature's head, which bursts with "a slushy nastiness as of a cloven sunfish"- only to immediately begin reforming." The Alert escapes, with Johansen's fellow crewmate having gone insane and dying soon afterwards.
After finishing the manuscript, Thurston realizes he is now a target, thinking, "I know too much, and the cult still lives."