The film is set during the Jesuit Reductions, a program by which Jesuit missionaries set up missions independent of the Spanish state to teach Christianity to the natives. It tells the story of a Spanish Jesuit priest, Father Gabriel (Jeremy Irons), who enters the South American jungle to build a mission and convert a community of Guaraní Indians to Christianity.
In the opening scene, a Jesuit missionary is lashed to a cross by the Guarani Indians who live above the spectacular Iguazu Falls. The missionary is then sent over the falls, cross and all, while praying fervently to God. His martyrdom inspires the gentle Father Gabriel to scale the hazardous falls and try to reach out to the tribe. Initially, the Guarani warriors prepare to kill him, but after Gabriel plays an unforgettable solo on his oboe, they allow him to live and he gradually wins their trust.
Mercenary and slaver Rodrigo Mendoza (Robert De Niro) makes his living kidnapping natives and selling them to nearby plantations, including the plantation of the Spanish Governor Cabeza (Chuck Low). Mendoza subsequently finds his fiancee (Cherie Lunghi) and his younger half-brother Felipe (Aidan Quinn) in bed together. He kills Felipe in a duel. Although he is acquitted of the killing by Cabeza, Mendoza spirals into depression. Father Gabriel visits and challenges Mendoza to undertake a suitable penance. Mendoza accompanies the Jesuits on their return journey, dragging a heavy bundle containing his armor and sword. After initially tense moments upon reaching the outskirts of the natives' territory, though they recognize him, the natives embrace a tearful Mendoza and cut away his heavy bundle.
Father Gabriel's mission is depicted as a place of sanctuary and education for the Guaraní. Moved by the Guaraní's acceptance, Mendoza wishes to help at the mission and Father Gabriel gives him a Bible. In time, Mendoza takes vows and becomes a Jesuit under Father Gabriel and his colleague Father Fielding (Liam Neeson).
The Jesuit missions were safe, because they were protected under Spanish law. The Treaty of Madrid (in the year 1750) reapportions the land in South America. The land on which the Jesuit missions were located was transferred to the Portuguese, and Portuguese law allows slavery. The Portuguese colonials seek to enslave the natives, and as the independent Jesuit missions might impede this, Papal emissary Cardinal Altamirano (Ray McAnally), a former Jesuit priest himself, is sent from the Vatican to survey the missions and decide which, if any, should be allowed to remain.
Under pressure from both Cabeza and Portuguese Governor, Don Hontar (Ronald Pickup), Cardinal Altamirano is forced to choose between two evils. If he rules in favor of the colonists, the indigenous peoples will become enslaved; if he rules in favour of the missions, the entire Jesuit Order may be condemned by the Portuguese and the European Catholic Church could fracture. Altamirano visits the missions and is amazed at their industry and success, both in converting the Indians and, in some cases, economically.
At Father Gabriel's mission of San Carlos he tries to explain the reasons behind closing the mission and instructs the Guaraní that they must leave. The Guaraní question his authority, and Father Gabriel and Mendoza, under threat of excommunication, state their intention to defend the mission should the plantation owners and colonists attack. They are, however, divided on how to do this, and they debate how to respond to the impending military attack. Father Gabriel believes that violence is a direct crime against God. Mendoza, however, decides to break his vows to militarily defend the Mission. Against Father Gabriel's wishes, he teaches the natives the European art of war and once more takes up his sword.
When a joint Portuguese and Spanish force of soldiers attack, the mission is initially defended by Mendoza, Fielding and the Guaraní. They are no match for the military force and Mendoza is shot and fatally wounded. When soldiers enter the mission village, they are slowed by the singing of Father Gabriel and the Guaraní women and children who march in the procession. The soldiers are reluctant to fire at a Mass. In spite of this, the Portuguese commander orders the attack and Father Gabriel, the rest of the priests and most of the Guaraní, including women and children, are gunned down. Only a handful escape into the jungle. Fielding sacrifices himself by killing the Portuguese commander and a few more soldiers before he himself is killed.
In a final exchange between Cardinal Altamirano and Don Hontar, Hontar laments that what happened was unfortunate but inevitable because "we must work in the world; the world is thus." Altamirano replies, "No, thus have we made the world. Thus have I made it."
Days later, a canoe of young children return to the scene of the Mission massacre and salvage a few belongings. They set off up the river, going deeper into the jungle, with the thought that the events will remain in their memories. A final title declares that Jesuits and others continue to fight for the rights of indigenous people. The text of John 1:5 is displayed: "The light shines in the darkness, and the darkness has not overcome it."