The film begins with Huo Yuanjia fighting and defeating three Westerners: a British boxer, a Belgian lancer and a Spanish fencer. While waiting for the fourth match to begin, Huo remembers his father Huo Endi teaching martial arts. The story is then told in an extended flashback. Watching his father fight, the young Yuanjia wants to participate, but his father is concerned about his asthma. Yuanjia sees his father in a leitai match with Zhao, who won the fight dishonourably by retaliating when Huo Endi held back what would have been a fatal blow. Humiliated by his father's defeat, Huo Yuanjia vows to regain the Huo family's honour and pride. He practices martial arts behind his father's back. As the years pass, Huo Yuanjia defeats several opponents in leitai matches and becomes a famous martial artist in Tianjin. As he becomes successful, he becomes arrogant and ruthless towards his opponents, compared to his late father who advocated showing mercy to opponents.
When a rival martial arts master named Qin Lei injures one of his followers, Huo feels insulted and confronts Qin at a restaurant owned by Huo's childhood friend, Nong Jinsun. After failing to talk his friend out of fighting and fed up with his ruthless behavior, Jinsun ends his friendship with Huo. The confrontation escalates into a fight between Huo and Qin, in which Huo emerges as the victor by killing Qin with a fatal blow. Qin's godson seeks vengeance and kills Huo's mother and daughter in retaliation. Huo goes to Qin's house, where Qin's godson admits to the murders before killing himself. Huo learns that it was his follower who had insulted and provoked Qin, which prompted Qin to beat him.
Wracked with guilt, Huo flees Tianjin, and wanders aimlessly for many months. He nearly drowns in a river, but is saved by Granny Sun and her blind granddaughter, Yueci. They bring him back to their village. Huo, guided by their kindness, begins to learn the value of compassion and mercy.
In 1907, Huo returns to Tianjin and sees the changes that have taken place. He apologizes to Qin's family and reconciles with Jinsun, who is now a businessman. He challenges the American wrestler, Hercules O'Brien. Prior to the match, Huo requests that he and Hercules fight with honor and civility to which the Announcer, taking advantage of the language barrier, deliberately mistranslates Huo's request to "He wants to kick your butt". During their match, Huo saves O'Brien from being impaled on some nails and wins the gratitude of O'Brien, who names Huo the victor. Huo's fame spreads with successive bouts against other foreign fighters. In 1909, with funding from Jinsun, he founds Chin Woo Athletic Association in Shanghai.
The members of the foreign chamber of commerce fear that Huo's victories might fan anti-foreign sentiments among the Chinese people and thus become a disadvantage to them. They propose a match between Huo and four foreign champions. Huo takes up the challenge, even though he will have to fight four bouts in a row. Before the matches, Huo meets the Japanese champion Tanaka for tea and strikes up a friendship.
The film then returns to the competition shown in the opening scenes. On September 14 1910, Huo, after defeating the European challengers, faces Tanaka. In the first round, they fight with their weapons of choice. Huo uses a sanjiegun while Tanaka uses a katana. In the heat of the fight, they accidentally exchange weapons. However, Huo is able to handle the katana proficiently, while Tanaka fumbles with the sanjiegun. Huo offers to exchange weapons with Tanaka, and the first round ends in a draw. Before the next round, Huo unknowingly drinks tea poisoned by the members of the foreign chamber of commerce. In the second round involving unarmed combat, Huo has difficulty breathing and begins to lose his strength. He collapses and starts coughing blood, the result of arsenic poisoning. Tanaka and Huo's supporters demand that the match be halted and postponed, but Huo wishes to continue, since he is going to die in any event. Huo is dominated by Tanaka but manages to deliver a blow to Tanaka's chest, using the same technique that killed Qin. He then collapses. Tanaka, aware that he would have died had Huo used more force, declares Huo the victor as Huo dies.
In the epilogue, Huo's spirit practices wushu on a field while Yueci observes him. Huo turns to her and smiles, indicating a lovers' reconciliation.