In the Valley of Peace, a land in Ancient China inhabited by anthropomorphic animals, Po Ping the giant panda is a fan of kung fu who idolizes the Furious Five – Tigress, Monkey, Crane, Viper, and Mantis – a quintet of kung fu masters trained by Master Shifu the red panda. However, Po feels unable to pursue his dream of learning kung fu because he has to help his adoptive father, Mr. Ping the goose, in his noodle restaurant.
Grand Master Oogway, an old Galápagos tortoise, is Master Shifu's mentor and friend. He has a vision that Shifu's former protégé, the evil snow leopard Tai Lung, will escape from prison and return to the valley to exact his revenge for being denied the Dragon Scroll, which is said to hold the secret to boundless power. Panicked, Shifu sends his messenger, Zeng the goose, with a request for the prison to tighten its security. He then holds a tournament for the Furious Five so that Oogway can identify the Dragon Warrior, the one kung fu master worthy of receiving the Dragon Scroll. Po arrives too late to enter the arena; desperate to see the Dragon Warrior, Po straps himself to a set of fireworks and launches himself into the middle of the arena in front of Oogway as he points towards the Dragon Warrior. To the astonishment of everyone present, Oogway proclaims Po as the chosen warrior.
Unwilling to accept Oogway's decision, and believing it to be an accident, Shifu tries to dispose of Po with a harsh training regime. The Furious Five berate Po as an enthusiast with no potential in martial arts. Po considers resigning, but after receiving encouragement from Oogway, he endures his training and gradually befriends the Five with his durability, resilience, culinary skill, and good humor. One night when Po talks about Shifu's treatment toward him, Tigress tells the story of how Shifu raised Tai Lung since finding him as a cub and trained him in kung-fu. After Tai Lung was denied the Dragon Scroll he went on a rampage across the valley and tried to take the scroll by force, with Shifu unable to fight his adoptive son. Though Oogway was able to stop him, Tai Lung's betrayal caused Shifu to become cold and distant.
Meanwhile, Tai Lung escapes from prison, by picking his locks with Zeng's fallen feather. Shifu horrifyingly learns of Tai Lung's escape from Zeng and informs Oogway, who extracts a promise from Shifu to believe in Po, and then passes on to the heavens in a stream of peach blossoms. Still unable to grasp the basics of kung fu, Po despairingly admits that he has no chance of defeating Tai Lung. Overhearing this, the Five leave to stop Tai Lung themselves. However, Shifu discovers that Po is capable of impressive physical feats when motivated by food. Using food as positive reinforcement, Shifu successfully trains Po by incorporating these feats into an innovative kung fu style.
Meanwhile, the Five battle with Tai Lung, but are defeated by his nerve attacks. He spares Crane to transport the rest of the Five, still paralyzed from his nerve strikes, back to Shifu as a warning. After reviving them, Shifu decides that Po is ready to receive the Dragon Scroll, but the scroll reveals nothing but a blank, reflective surface. Believing the scroll to be useless, Shifu orders Po and the Five to evacuate the valley while he faces Tai Lung. A distraught Po finds Mr. Ping. In an attempt to console his son, Mr. Ping reveals that the secret ingredient to his famous "special secret ingredient noodle soup" is "nothing", explaining that things are special when believed to be. Po realizes that this is the message of the Dragon Scroll and goes back to confront Tai Lung.
Po arrives to find Shifu badly injured and defeated. He then becomes a formidable challenge for Tai Lung, frustrating him with confusing fighting techniques on top of his excessive body fat that renders him with an incredible ability to absorb damage and immunity to Tai Lung's nerve strikes. Tai Lung momentarily beats Po and retrieves the scroll, but he is unable to understand it and continues attacking Po. Eventually, Po defeats Tai Lung in combat by using the mysterious Wuxi Finger Hold to vanquish him.[b] Po is praised by the Valley of Peace and earns the respect of the Furious Five, who fully acknowledge him as a true kung fu master, while Shifu finally attains peace.
In the post-credit scene, Po and Shifu eat under the peach tree where Oogway used its blossoms to pass on. A seed of one of the fruits (earlier planted there by Shifu) is seen growing into a sapling.