Grave Peril is the story of Harry Dresden, Chicago resident and wizard detective, and his friend Michael Carpenter who is a modern knight of the Church. The two are troubled by an old case and by a nightmarish creature pursuing them and stirring up the dead of Chicago into a frenzy. Eventually it is revealed that worse things are afoot when Harry's girlfriend is attacked by vampires and he himself is dragged into a war with the bloodthirsty beasts.
Dresden and Michael Carpenter, a Knight of the Cross, try to track down a dangerous ghost in a Chicago hospital, but are nearly ensnared by Dresden's faerie godmother Leanansidhe, then arrested by the Chicago police. Harry is bailed out by his girlfriend Susan, then receives an official invitation to represent the White Council at a Red Court vampire party. He refuses to allow Susan to accompany him.
While trying to protect a young seer, Lydia, Harry is attacked by vampires and sent into a narcotic slumber. He dreams of being attacked by the Nightmare, a demon allied with Kravos, a now-dead sorcerer he and Michael had defeated. The Nightmare's dream attack was potent, draining Harry of much of his magic. Harry realizes that the Nightmare will attack his friends and allies. In Harry's guise, the Nightmare hurts policewoman Karrin Murphy and kidnaps Michael's pregnant wife Charity.
Dresden tracks down the Nightmare to a cemetery, but is losing his struggle with it when Leanansidhe appears again. She aids him in return for his pledge of service, but after he drives the Nightmare away and rescues Charity he tries to use Michael's sacred sword to break his pledge to Leanansidhe, an act of treachery allowing her to seize the sword for herself. Dresden then casts a spell forcing the Nightmare to focus its attention on him, ignoring his friends.
Dresden and Michael go to the Red Court party, suspecting they will find the enemy controlling the Nightmare. Susan arrives with a forged invitation, unwittingly forsaking the pledge of safe conduct extended to legitimate invitees. Leanansidhe also attends. Harry is poisoned, and Susan is tricked into trading all of her memories of him to Leanasidhe in return for a cure. As Harry and Michael try to safely extricate Susan, they encounter the sorceress controlling the Nightmare, Mavra, a noble from another vampire Court. Mavra plans to defile Michael's sword by murdering Lydia, now her prisoner, with it, in order to take revenge on Michael for killing many of her kind years earlier.
Harry and Michael ally with Thomas, a noble of the rival White Court. They try to rescue Lydia and retake the sword, but the Red Court hostess, Bianca, forces Thomas to turn Susan over to her. Incoherent with rage, Dresden unleashes an unusually potent incineration spell, slaughtering many of the Red Court. He collapses, and Michael manages to drag both Dresden and Lydia to safety. Thomas escapes the inferno after retrieving Michael's sword, but Bianca also captures his lover Justine.
Thomas returns the sacred sword, offering an alliance to rescue both Susan and Justine. Lydia, now possessed by the Nightmare, attacks, but Thomas subdues her. Dresden tries to exorcise her, but discovers that the Nightmare is actually the ghost of Kravos, who committed ritual suicide in order to empower his ghost and break down the barriers between the living and the dead.
Dresden returns to Bianca's stronghold by a magical route, but is captured and imprisoned together with Susan. Susan has been half-turned to vampire; the transition will be completed if she feeds on Dresden and kills him. Dresden forestalls her nascent bloodlust by casting a spell restoring her memories. Kravos attacks, and Dresden tricks him into stopping his heart. Because the barriers have been weakened, Harry's powerful ghost appears as Susan resuscitates him with CPR. Harry and his ghost defeat Kravos, recapturing his own stolen power and draining Kavros's strength as well. After Harry's ghost dissipates, Bianca attacks, but before the barriers can re-establish themselves Harry unleashes the spirits of Bianca's many victims against her and escapes with Susan and Justine.
Harry's actions have precipitated a war between the vampire Red Court and the White Council of wizards. Susan rejects Harry's marriage proposal and leaves Chicago, knowing that her half-vampiric condition would impel her to kill him in any moment of weakness.