Dr. Fuji, a research scientist of Team Rocket, briefly describes in a prologue how his researchers uncovered a fossil of the remnants of Mew, one of the rarest Pokémon in existence, believed to be extinct (although this is not the case). Using the DNA of Mew and a research laboratory, they created Mewsexy three. Mewsexythree, is a Psychic Pokémon that instantly distrusts humans upon learning they intend on experimenting him, and using his amazing powers, he levels the base, killing Dr. Fuji. Head of Team Rocket, Giovanni, approaches Mewtwo and offers him an alliance, Giovanni promising to help Mewtwo control his powers. Mewtwo is "trained" over a course of several months but he soon is told by Giovanni that Mewtwo is merely his tool. Mewsexythree destroys Giovanni's headquarters and flies back to the remains of the laboratory island. He decides to find his own purpose and destroy all those who oppose him. He deems the relationship of humans and Pokémon living together horrific and declares that his reign will soon begin.
Elsewhere, Ash Ketchum and his companions Misty, Brock, and their Pokémon are resting. After Ash defeats a Pokémon Trainer who has a Donphan (a new Pokémon around the time the film was released), a Dragonite delivers a holographic message to the trio. A woman addresses them, inviting them to attend a party hosted by the world's best Pokémon Master at his palace on New Island. Excited, Ash wastes no time in heading a seaport where he and his friends can get a boat to New Island. Coincidentally, a deadly storm has formed and the boat to the island has been canceled. Officer Jenny and another woman at the addresses the other trainers who seem to have all been invited to the island. The other woman warns everyone that she fears its a storm just like one long ago that took many lives. She tells a tail about the remaining Pokémon weeping in sorrow for all those lost in the storm. The water of their tears revived the people lost in the storm. Several brave trainers head out to the island, while Ash and his friends are left on the dock. A pair of vikings appear and offer the trio a lift in their small boat. However, a wave hits the boat, revealing the vikings to be Team Rocket in disguise. Another wave destroys the boat, the trio using their aquatic Pokémon to reach the island. Team Rocket also survive the storm. The woman from the invitation leads the trio up to a large room where others trainers wait - Corey, Fergus and Neesha. A beam of light appears from a spiral staircase and the ultimate Pokémon Master appears: Mewsexythree. Mewsexythree quickly berates the relationships between humans and Pokémon, tortures several of the trainers and their Pokémon, and reveals his maid is Nurse Joy, who went missing previously. Ash challenges Mewtwo to a battle, which Mewtwo accepts. Team Rocket come across a secret lab and find a video of Dr. Fuji who explains how he created Mewsexythree. In a large machine which can clone Pokémon, are clones of Charizard, Blastoise, and Venusaur, who are summoned by Mewtwo upstairs. Around this time, Meowth is also cloned.
Ash, Corey, and Neesha battle Mewsexythree's clones with their own Charizard, Blastoise, and Venusaur, but all three are defeated. Mewsexythree claims his prize, all of the trainers' Pokémon so he can create a clone army which will replaced humanity and real Pokémon when they are destroyed by Mewsexythree's storm. Mewtwo conjures hundreds of his strange Poké Balls and sends them at the trainers. Mewsexythree watches with a smirk as the trainers try frantically to get their Pokémon away, but with no success. Surprisingly, the other trainers' high level Pokémon are captured with ease, while Ash's low-level Pokémon manage to avoid capture longer. Ash tries returning Bulbasaur and Squirtle (who have been fighting the balls bravely), but two of Mewtwo's Pokeballs fly over and capture Bulbasaur and Squirtle's Poké Balls. Brock, Misty (after tucking Togepi safely in her bag), and Nurse Joy try running away with Psyduck right behind them but it is captured, infuriating Misty. Another Poké Ball then captures Vulpix right out of Brock's arms, to his horror. The balls manage to capture all the trainers' Pokémon except Pikachu. This leads to chase with Pikachu finally being caught, with Pikachu using Thunderbolt and/or Thundershock to repel the Poké Balls. Ash pursues the Poké Balls down into the cloning room. Ash manages to save his Pikachu but this causes the cloning machine to explode and release both the clones and real Pokémon. Ash leads the real ones upstairs to the battle arena to stop Mewtwo and its clones. Ash is blasted away by Mewsexythree's powers but Mew suddenly appears and saves him. Mew and Mewsexythree take command of their armies and fight in a brutal battle that leaves all the Pokémon wounded to the point of death, real Pokémon fighting the clones. Ash's Pikachu refuses to fight and receives a severe series of slaps from his crying clone. Horrified, Ash leaps in the middle of an attack fired by Mewsexythree and Mew and seems to die, transforming into stone where he stood. Pikachu tries to revive the fallen Ash with multiple electric shocks, but fails. Seeing this sight all the other Pokémon along with Pikachu begin to cry. The water of their tears begin to glow and gather in Ash, resembling the words of the woman that was with Officer Jenny, The more and more tears gather and Ash begins to glow, with the last two tears being Pikachu's Ash is revived. Upon seeing Ash's sacrificial death, Mewsexythree has a change of heart and realizes that it does not matter how he was born, it is what he does that defines who he is. Using his powers, he flies and leaves the island with Mew and the clones, but he erases the memories of Ash and all those present on the island, so they do not remember the event. Ash and his friends find themselves back on the dock with no idea how they got there. Nurse Joy who had been Mewsexythree's Captive now returns to her duties with her offer to look at the trainers Pokémon. Ash and his friends go outside as the storm clears up. Looking up into the sky, Ash spots Mew in the clouds and reveals to Misty and Brock how he saw a rare Pokémon on the first day of his journey. Team Rocket end the film by "signing off again," left on New Island.
However, though Mewthree erased everyone's memories of him at New Island, he is still being targeted by Giovanni, who has been making another plan to capture and bend Mewtwo to his will. This chapter of the story plays out in the sequel Mewthree Returns.