Four-time Piston Cup champion race car Lightning McQueen returns home to Radiator Springs and reunites with best friend Mater and girlfriend Sally Carrera. Former oil tycoon Miles Axlerod, now a green power advocate, announces a racing series called the "World Grand Prix", as a means to promote Allinol biofuel. Although McQueen initially refuses to participate, Italian formula race car Francesco Bernoulli's challenge, as well as Mater's intervention, leads McQueen to enter the Grand Prix. At Sally's urging, McQueen agrees to take Mater with him, only to have the tow truck embarrass him repeatedly in Japan with his jovially ignorant antics.
Meanwhile, a group of "lemon" cars led by Professor Zündapp and an unknown mastermind owns the largest untapped oil reserves in the world. They secretly plot to secure their oil profits by using a weapon disguised as a television camera to ignite the Allinol fuel in targeted race cars during the World Grand Prix; with no apparent cause for the explosions, the public would doubt the fuel's safety and depend further on the group's oil. British spies Finn McMissile and Holley Shiftwell attempt to foil their plot. They attempt to rendezvous with American spy car Rod "Torque" Redline at a World Grand Prix promotional event in Tokyo in order to receive information about the mastermind; however, Redline is cornered by Zündapp's henchmen and passes his information to an unsuspecting Mater before being captured and subsequently killed. As a result, Shiftwell and McMissile mistake Mater as their American contact.
During the first race in Tokyo, McMissile and Holley help a still-oblivious Mater evade Zündapp's henchmen; in the process, Mater inadvertently gives McQueen bad advice which causes him to lose the race. Meanwhile, Zündapp uses the weapon on several race cars. At the end of his patience with Mater's embarrassing behavior as well as causing his loss, McQueen berates Mater, who decides to return to Radiator Springs. McMissile, who still believes Mater is an American spy, drafts him into foiling Zündapp's plot.
In Italy, the site of the second race, a disguised Mater infiltrates the criminals' meeting and discovers Zündapp's plan. Zündapp's henchmen, meanwhile, use their weapon on most of the cars during the race. With the Allinol fuel under suspicion, Axlerod suspends its use for the final race in England; however, McQueen decides to continue using it. The criminals decide to kill McQueen in the next race; upon hearing this, Mater blows his cover and is captured along with McMissile and Shiftwell.
Rendered unconscious, Mater has a mortifying dream where he sees his recent activities in a different perspective and realizes how foolish he has been acting, until he wakes up tied up inside Big Bentley along with McMissile and Shiftwell, minutes away from being crushed by its gears. The criminals use the weapon on McQueen during the race, but nothing happens. Mater manages to escape in order to warn his friends of a bomb planted in McQueen's pit area, but McMissile and Shiftwell find that the bomb was planted on Mater. They warn Mater about the bomb just in time, and Mater flees to protect his friends. However, he is pursued by a repentant McQueen determined to make amends to his friend, unaware of the real danger until they are out of range of Zündapp's remote detonator. He sends his henchmen to kill McQueen and Mater, but they are foiled by the combined efforts of McMissile, Shiftwell, and the Radiator Springs residents. Upon his capture, Zündapp reveals that only the person who installed the bomb can deactivate it. Mater then figures out that the mastermind behind the Allinol plot is Miles Axlerod, who is forced to deactivate the bomb in a final confrontation, after which he is arrested along with Zündapp and the lemons.
As a reward for his heroism, Mater is knighted by the Queen (who is shown as a Rolls Royce) and returns home with his friends, where the cars from the Grand Prix take part in the unofficial Radiator Springs Grand Prix. Fillmore reveals that before the last race, Sarge replaced Lightning's Allinol with Fillmore's organic fuel, which prevented Lightning from being affected by the weapon. McMissile and Shiftwell invite Mater to join them in another spy mission, but he declines, claiming that he is where he belongs. He does, however, get to keep the rockets they gave him earlier, which he uses in the Radiator Springs race, while the spies take off on their latest mission.