The plot is centered on a 'fish girl', or mermaid, who runs away from her home in the sea. She ends up stranded on the shore and is rescued by Sōsuke, a five year old boy who lives on a cliff. After taking a great liking to her, Sōsuke names her Ponyo and vows to protect her forever. Meanwhile, her father Fujimoto is looking for his daughter, upset that she ran away. He calls his wave demons to return Ponyo to him. Sōsuke is heartbroken by this, and goes home with his mother, Lisa, who tries to cheer him up, but to no avail.
Ponyo and her father have a confrontation, where Ponyo refuses to let her father call her Brünnhilde and declares she is Ponyo, and voices her desire to become human, because she has started to fall in love with Sōsuke. Her father silences her with difficulty and goes to summon Ponyo's mother. Meanwhile, Ponyo, with the help of her sisters, breaks away from her father, and uses his magic to make herself human. This causes an imbalance in the world, which in turn results in a huge storm. Riding on the waves of the storm, Ponyo goes back to visit Sōsuke. Lisa, Sōsuke, and Ponyo stay the night at Sōsuke's house, hoping the storm will be over, whereupon Lisa leaves the house to check up on the residents of the nursing home she works at.
Granmammare, Ponyo's mother, arrives at Fujimoto's submarine. Fujimoto notices the moon has come out of its orbit and the satellites are falling like shooting stars. Granmammare declares that if Sōsuke and Ponyo pass a test, Ponyo can live as a human and the world order will be restored.
Sōsuke and Ponyo wake up to find that most of the land has been submerged. Lisa has not come home yet, so with the help of Ponyo's magic, they make Sōsuke's toy boat life-size and set out to find Lisa. While traveling they see ancient extinct fish swimming, such as the Gogonasus.
After landing and finding Lisa's empty car, Ponyo and Sōsuke go through a tunnel. There Ponyo loses her human form and resumes the form of a fish. Sōsuke and Ponyo are captured by Fujimoto and they safely arrive at the nursing home and meet Granmammare. Granmammare asks Sōsuke if he can love Ponyo even if she is a fish or mermaid. Sōsuke replies that he likes Ponyo in all forms. Granmammare then allows Ponyo to become human once Ponyo kisses Sōsuke on the surface