Filmen i Los Angeles under Depressionen, hvor privatdetektiven Jake 'J.J' Gittes (Nicholson) bliver hyret til at udspionere Hollis Mulwray, der er chefingeniør for byens vandforsyning. Kvinden der ansætter ham udgiver sig for at være Elvyn Mulvray, Hollis' kone. Gittes forfølger Hollis og fotograferer ham sammen med en ung kvinde. Billederne bliver en skandale, og Gittes opdager at han ikke har arbejdet for Elvyn Mulvray, men en kvindelig journalist.
Sporene peger mod en skandale i bystyret. På trods af en alvorlig tørke og en deraf følgende debat om at bygge en dyr dæmning, pumper forsyningsvæsenet hver nat en stor mængde ferskvand ud i havet.
Gittes følger et tip om at opsøge Hollis Mulvray ved et reservoir, men da han ankommer er politiet ved at fiske Mulvrays lig op ad det. Under efterforskningen spørger politiet fru Mulvray om dødsfaldet og antager at hun ansatte Gittes, hvilket hun understøtter. Hun takker ham og hyrer ham til at efterforske hendes mands død.
Senere den nat, men Gittes forsøger at bryde ind i det aflåste vandreservoir, opdages han af forsyningsvæsenets sikkerhedschef Claude Mulvihill og en bølle (spillet af Polanski selv), der snitter Jakes næsebor, så han kan "holde snuden for sig selv". Gittes bliver ringet op af Ida Sessions, den kvinde der blev betalt for at spille Elvyn Mulvray, og hun foreslår ham at kigge i avisernes dødsannoncer. På vandforsyningens kontor opdager Gittes nogle fotografier af en ældre mand han havde set Hollis Mulvray diskutere med, få dage før hans død. Manden, Noah Cross (Huston), er Evelyn Mulwrays far, og han er tidligere indehaver af byens vandforsyning og Hollis' forretningspartner. Cross afbrød forbindelsen, da de solgte deres andele til byen.
Cross hires Gittes to find the blonde girl Hollis had been seeing, saying that she might know what happened to him. Acting on a hint from Sessions, Gittes begins to unravel an intricate water scandal. Cross and his partners have been forcing farmers out of their land so they can buy it cheap, after which a newly-built (and controversial) dam and water system would start redirecting much of L.A.'s water supply to that land, dramatically increasing its value. Since Cross wants no record of such transactions, he has partnered with a retirement home community in such a way that many of the eldest residents within (one of whom is mentioned in the obituary column) would legally, but unknowingly, own the land.
Gittes follows Evelyn to a middle-class house and sees Mulwray's girlfriend crying. Evelyn claims this is her sister, who was crying because she had just learned about Hollis' death. Later that night, Sessions is murdered. Police Lt. Escobar points out that the coroner's report proves that salt water was found in Mulwray's lungs even though the body was found in a freshwater reservoir.
Gittes returns to Evelyn's mansion, where he discovers a pair of eyeglasses in a garden saltwater pond. Gittes confronts Evelyn, who reveals that the blonde girl, Katherine, is both her sister and her daughter; Gittes asks Evelyn if her father raped her and she shakes her head, but the suggestion is that he did. Gittes then chooses to help Evelyn escape. Evelyn remembers that the eyeglasses could not have been her husband's because they are bifocals. Gittes arranges for the two women to flee to Mexico and instructs Evelyn to meet him at her butler's address in Chinatown. Evelyn leaves, and Cross arrives with Mulvihill under the pretext that Gittes has found the girl; however, Gittes confronts Cross with the accusation of murder and the glasses. Mulvihill takes away the eyeglasses that are the only physical evidence. Cross forces Gittes to take him to the girl. When Gittes arrives at Evelyn's hiding place in Chinatown, the police are already there.
When Cross approaches the girl, demanding custody of her, Evelyn pushes him back, shoots him in the arm and starts her car. The police arrest Gittes, and as Evelyn drives away, they open fire and Evelyn is shot and killed. Cross clutches Evelyn's shrieking daughter as a devastated Gittes is comforted by his associates, who urge him to walk away: "Forget it, Jake. It's Chinatown."