Captain Nathan Algren (Tom Cruise), born in United Kingdom but naturalized American, is a disenchanted Ex-United States Army captain, tortured by the guilt of his past transgressions against Native American civilians. After losing his previous job of sharing his old war experiences in public demonstrations, he is recruited by his former commanding officer Lieutenant Colonel Bagley (Tony Goldwyn), whom Algren loathes and blames for his waking nightmares, on behalf of a Japanese businessman, Mr. Omura (Masato Harada). He is hired to help the new Meiji Restoration government train the new Western-style Imperial Japanese Army. With him are his old army colleague Zeb Gant (Billy Connolly) and Simon Graham, (Timothy Spall) a British translator.
Under the command of Bagley, Algren trains an army of peasants and farmers in firearm techniques, and before they are sufficiently trained, is forced to take them into battle to defend Omura's investment in a new railway, against a group of samurai rebels led by Katsumoto (Ken Watanabe). During the battle, the samurai slaughter Algren's vulnerable soldiers, and Bagley withdraws from the field. Gant kills several samurai, but is soon killed. Algren manages to kill some samurai (including the samurai who killed Gant) with a pistol, a saber and a broken spear embroidered with a flag depicting a white tiger. Despite his best efforts he is soon overpowered. However, the flag on the spear reminds Katsumoto of a vision he had during meditation, of a white tiger fighting off his attackers. Seeing the resemblance, Katsumoto makes Algren his prisoner instead of letting his samurai kill him. In self-defense the badly wounded Algren deals a death blow to Katsumoto's own brother-in-law, the red-masked Samurai, Hirotaro. He is taken to an isolated village, where he gradually recovers from his wounds (as well as his rampant alcoholism). He lives with the family of Hirotaro, namely his widow Taka, her two sons and Katsumoto's son Nobutada (Shin Koyamada). Over time, Algren's mental and emotional state improve as he learns the way of the samurai, (Bushido). He develops romantic feelings for Taka, studies swordsmanship from a skilled sword master (Ujio) and learning Japanese, converses with the local residents, gaining their respect.
One night, as the people watch a comic play, a group of ninja assassins attack the village, intent on killing Katsumoto. The samurai succeed in defeating the ninja, but suffer losses. Algren wins the respect and admiration of the samurai by fighting alongside them, distinguishing himself in the battle by his defense of Katsumoto. Though Katsumoto does not admit it, Algren realizes the attack was ordered by Omura.
With the arrival of Spring, Nathan is taken back to Tokyo, where he learns that the army, under Bagley's command, is now better organized and outfitted with howitzers and Gatling guns. He declines Omura's job offer to lead the army against Katsumoto, to crush the Samurai rebellion. He also witnesses the brutality of the Japanese soldiers who enforce the new laws forbidding samurai to publicly carry swords and wear their hair in chonmage. At the same time, Katsumoto offers his counsel to the Emperor, to whom he was once a teacher. He learns that the young Emperor's hold upon the throne is much weaker than he thought, and that he is afraid to challenge men like Omura, who control vast wealth and political power.
Katsumoto is arrested and confined to his quarters in Tokyo when he refuses to remove his sword in the Emperor's presence, but Algren, having learned that Omura has ordered his assassination, and narrowly escaping an assassination attempt on his own life (through judicious use of martial arts he learned in Katsumoto's camp), decides to rescue him with help from several of Katsumoto's loyal followers. During the rescue mission, Katsumoto's son Nobutada is fatally wounded: he stays behind to allow Algren, Katsumoto and the rest of the team to escape. Algren watches as he is cut down, a sight that strengthens his resolve. Katsumoto is still mourning the loss of his son when he receives word that a large Imperial Army unit is marching out to battle the samurai. A force of warriors, numbering only 500, is rallied. Algren makes a reference to the Battle of Thermopylae where a small army can inflict disproportionate casualties and cause great damage against overwhelming odds by using the right tactics and terrain as force multipliers. Algren then receives a katana of his own. He is also given, by Taka, her dead husband's armor. She dresses him into the armor, and they kiss just before Algren leaves.
With the assistance of Algren, the samurai plan to make their final stand, using a combination of superior close-combat ability and their enemy's over-confidence. When a large Imperial Army, under the command of Omura and Bagley confronts the samurai's rebel forces, the samurai fall back to higher ground, preventing the Imperial army from using its superior firepower. As expected, Omura immediately orders the infantry to pursue them as the samurai lead them into a trap, setting a fire to cut off their escape routes. The samurai then unleash volleys of arrows on the infantrymen, killing many.
Drawing their swords, the samurai, Algren and Katsumoto amongst them, charge the confused and wounded infantrymen. A second wave of Imperial infantry follows behind and quickly joins the battle, as does the samurai cavalry. A savage mêlée ensues that leaves many dead on both sides before the soldiers retreat. Realizing that fresh Imperial forces are coming and that defeat is imminent should a second battle occur, the surviving samurai resolve to make a final charge. They charge on horseback, their numbers being cut to pieces by Japanese cannons and then by another unit of infantrymen. During the battle, Bagley shoots Katsumoto but Algren then throws his sword at Bagley before he can kill Katsumoto, killing him and saving Katsumoto's life. Against all odds, they manage to make it through the enemy lines. On approaching the Imperial rear line, and progressing enough to scare Omura, the Samurai are suddenly cut down by the Gatling guns the soldiers had acquired from the Americans. Katsumoto and Algren are badly wounded from the encounter, and are seemingly the only survivors. Overcome by the sight of the dying samurai, an Imperial lieutenant (originally trained by Algren), against Omura's wishes, orders the Gatling guns to cease fire. Katsumoto, obeying bushido in order to keep his honour, commits seppuku (ritual suicide) with help from Algren, ending his life. The Imperial troops, many of whose comrades have also been killed, show their respect by bowing to the fallen samurai. Algren, who survives the battle heavily wounded, stays at Katsumoto's side.
Later, as American ambassadors prepare to have the emperor sign a treaty that would give the US exclusive rights to sell firearms to the Japanese government, the injured Algren offers Katsumoto's sword as a present to the Emperor and urges the emperor to turn away the American ambassadors' offer. The Emperor agrees and tells the American ambassador that the deal is not in the best interests of Japan. Omura objects, and the Emperor – realizing he does not need to live in fear of Omura – confiscates his estates and fortunes. The Emperor is not the incompetent leader he seemed to be earlier. Omura is greatly distressed at his loss. The Emperor offers him Katsumoto's sword to commit seppuku if the dishonor is too great to bear. Omura however, lowers his head and stumbles away.
The movie ends and the viewer realizes that the narrator of the story is Simon Graham. Algren then returns to the samurai village where he was imprisoned earlier, and to Taka. Graham philosophically concludes Algren found a measure of peace "
that we all seek, and few of us ever find."
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