Sometime during the 1980s, college student Jeffrey Beaumont returns home to Lumberton, North Carolina, after his father suffers a near-fatal stroke. Walking home from the hospital, he cuts through a vacant lot and discovers a severed ear. Jeffrey takes the ear to police detective John Williams and becomes reacquainted with the detective's daughter, Sandy. After eavesdropping on her father discussing the ear with a colleague, Sandy tells Jeffrey that it somehow relates back to a lounge singer named Dorothy Vallens. Intrigued, Jeffrey enters Dorothy's apartment by posing as an exterminator and steals a spare key while she's distracted by a man in a distinctive yellow sport coat, whom Jeffrey takes to calling "The Yellow Man".
Jeffrey and Sandy attend Dorothy's nightclub act, in which she sings "Blue Velvet"; the pair leave early so that Jeffrey can investigate her apartment in her absence. However, Dorothy returns home early, discovers Jeffrey hiding in a closet, and threatens him with a knife. Believing Jeffrey's curiosity to be sexual and aroused by his voyeurism, Dorothy forces him to undress and fellates him. Jeffrey retreats back to the closet when their encounter is interrupted by the arrival of a man named Frank Booth, who beats and subjects Dorothy to a variety of violent sex acts during the course of a roleplaying game in which he refers to her as "mommy" and himself as "baby" and "daddy". It becomes apparent that Frank—a gangster—has abducted Dorothy's husband and child in order to force her into sex slavery. After Frank departs, Dorothy makes a romantic overture toward Jeffrey, who leaves. A disturbed Jeffrey relays the experience to Sandy, who tells him about a prophetic dream in which robins descend from the sky to eat and kill insects that have overrun the world.
Jeffrey returns to Dorothy's apartment, where she confesses an attraction to him and the two enter into a sadomasochistic sexual relationship in which Dorothy encourages Jeffrey to beat her, though he proves hesitant. Later, Jeffrey observes Frank in the audience at one of Dorothy's shows and begins following him, observing him engaging in drug dealing and a meeting with the Yellow Man. Jeffrey tells Sandy about his observations and the two briefly kiss; later, Jeffrey returns to Dorothy, who coerces him into a violent sexual encounter that leaves him disturbed.
Frank catches Jeffrey and Dorothy together and abducts them, forcing Jeffrey to accompany him to the home of a criminal associate named Ben, who is holding Dorothy's family hostage. While Frank permits Dorothy to see her husband and son, he forces Jeffrey to watch Ben perform an impromtu lip-sync of Roy Orbison's "In Dreams", which causes Frank to suffer a breakdown. Afterwards, he takes Jeffrey to a field, where he gives him a threatening, symbolic kiss before subjecting him to a violent beating.
The next day, Jeffrey goes to the police station, where he realizes that Sandy's father's partner is The Yellow Man, who has been murdering Frank's rival drug dealers and stealing their supplies from the evidence room for Frank to sell himself. Later, Jeffrey confesses everything to Sandy and the two attend a dance together where they admit their feelings for one another. On the way home, they’re pursued by an unidentified car and assume it’s Frank and his gang. As they arrive at Jeffrey’s home, Sandy recognizes the car as that of her boyfriend, Mike. Mike and his gang leap from his car, ready to beat up Jeffrey for stealing Sandy. Before the fight can start, a naked and beaten Dorothy emerges. Though confused, Mike realizes that there’s nothing between Jeffrey and Sandy, and he retreats as the two whisk Dorothy to Sandy’s house.
Jeffrey asks Sandy to tell her father everything and returns alone to Dorothy's apartment, where he discovers her husband dead and The Yellow Man mortally wounded. Remembering that Frank has a police radio in his car, Jeffrey uses the Yellow Man's walkie-talkie to lie about his presence in the apartment; when Frank enters, Jeffrey ambushes and shoots him dead with the Yellow Man's gun.
Sandy's father leads a police raid on Frank's headquarters, killing his men and crippling his criminal empire. Jeffrey and Sandy enter into a relationship and attend a family barbecue with his recuperated father, where they note the presence of a robin consuming a bug, and Dorothy is reunited with her son.
