Two years after the events of Final Fantasy VII, the survivors of Midgar have begun to build a new city, Edge, on the outskirts of the old metropolis. A strange disease known as "Geostigma" has arisen. After Cloud's showdown with Sephiroth, he has been living with Tifa in Edge. Marlene and an orphaned boy named Denzel have been entrusted to their care. After receiving a message from Tifa, Cloud is attacked by three men, Kadaj (voiced by Showtaro Morikubo in the Japanese version and Steve Staley in the English version), Loz (voiced by Kenji Nomura in the Japanese version and Fred Tatasciore in the English version), and Yazoo (is voiced by Yūji Kishi in the Japanese version and Dave Wittenberg in the English version), who believe that he has hidden their "mother". The leader, Kadaj, ends the battle as he discovers that Cloud does not have their "mother". Cloud responds to a message from Tifa, who tells him that the Turks have a job for him. At the meeting place, Cloud discovers that Rufus Shinra is still alive. Rufus attempts to enlist Cloud's help to stop the trio, but fails as he refuses and leaves. Kadaj arrives and demands that Rufus tell him where to find his "mother". It is revealed that his "mother" is Jenova's remains, and is somehow connected to the cause of the Geostigma. The trio are planning a new "reunion" that will culminate in an assault on the Planet.

Loz arrives at Aerith's church in Midgar in an attempt to find Jenova's remains, and is confronted by Tifa. After battling Tifa, he receives instructions on his cell phone to capture Marlene. Kadaj and the gang begin collecting children infected with Geostigma, including Denzel and the uninfected Marlene, and take them to the Forgotten City. Cloud attempts to rescue them but fails, and is quickly defeated, and is then rescued by Vincent Valentine, who reveals to Cloud what the trio is seeking and that it could result in the return of Sephiroth. Cloud agrees to return to Edge and face Kadaj in battle. In Edge, the trio call forth several monsters to attack the populace, including the summon "Bahamut SIN". While Cloud's companions deal with Bahamut SIN, Reno and Rude try to take care of Yazoo and Loz until Cloud arrives. Cloud and his friends are able to dispatch the monsters and Bahamut SIN.

In a nearby building, Rufus reveals to Kadaj that he has been in possession of Jenova's remains all along. He throws the box containing it from the edge of the building. Kadaj dives after the remains and recovers them shortly after Rufus shoots the box and damaging its contents. Kadaj spots Cloud in pursuit of him, and is followed to the ruins of Midgar. They battle each other in Aerith's church. Kadaj destroys the flowerbed, which releases an outflow of Lifestream-infused water that cures Cloud's Geostigma. Kadaj flees to the ruins of Shinra Headquarters, where they continue their fight. Outmatched, Kadaj absorbs Jenova's remains into his body, allowing Sephiroth to be reborn through the Remnant's body. Revealing that once those who die from the Geostigma return to the Lifestream, Sephiroth will be able to control it and use the Planet as a vessel to travel space in search of a new planet for him to rule. After a heated final battle, Cloud defeats Sephiroth who dissipates leaving a weakened Kadaj at Cloud's mercy. Aerith begins to pour healing rain across Edge, curing the people of their Geostigma. She tells Kadaj to be at peace, who believes her voice to be that of his "mother", and he is taken by the Lifestream. Cloud is then shot by Yazoo in the back. Also succumbing to the healing rain but bent on not going alone, Yazoo and Loz prepare one final blast at Cloud as he charges at them, resulting in a large explosion that engulfs all three.

Afterward, Cloud appears surrounded by a white light, and Aerith and Zack are heard. Aerith tells Cloud that his place is not with them yet, and sends him back. Cloud awakens in a pool of Lifestream-infused water in Aerith's church, surrounded by his friends, family and the citizens of Edge. After curing the Geostigma-infected Denzel, he turns and sees Aerith crouching by some children. As she stands and walks to the doorway, she turns back and says that everything's all right now, and steps into a white light with Zack. Cloud watches them go, and says that he knows that he's not alone.