Twelve-year-old Will Parry cares for his mentally ill mother in Oxford. When he accidentally kills an intruder, he runs away and discovers a portal to a parallel universe. In the seemingly deserted city of Cittàgazze, he encounters 12-year-old Lyra Silvertongue and her dæmon Pantalaimon, who arrived via a bridge in the sky created by her father, Lord Asriel .
The witch Serafina Pekkala overhears Mrs.Coulter's torturing a witch to discover the prophecy that concerns Lyra. Concerned for Lyra's safety, Serafina and a troop of witches attempt to find Lyra, while aeronaut Lee Scoresby searches for Stansilaus Grumman, who is rumoured to have knowledge of a powerful object which gives protection for those who hold it, with which Scoresby intends to protect Lyra.
Returning to his own world through the portal, Will eventually finds information on his missing father, who went missing on an expedition. Lyra searches through Will's Oxford, and meets Dr. Mary Malone, who is in possession of a machine that detects dark matter, which Lyra suspects to be Dust. Malone is attempting to communicate with it, though the next day police question Lyra and her knowledge of Will, and she accidentally gives him away. After accepting a lift from a gentleman introducing himself as Sir Charles Latrom, Lyra discovers that he has stolen her alethiometer. Sir Charles forces Will and Lyra into retrieving a mysterious knife from Cittàgazze for the alethiometer's return. There, they retrieve the knife, in which Giacomo Paradisi, the previous owner of the knife, reveals the true power of the knife: the ability to cut into other worlds, and cut through any material.
Will uses the knife to cut a hole from Cittàgazze into Charles's home. They overhear a conversation with Mrs Coulter and Lyra realises that he is really Lord Boreal, who came to Will's world long ago. Will also hears news of his father, who discovered a doorway between the worlds. They escape to Cittàgazze with the alethiometer and are rescued from marauding children by Serafina Pekkala, who attempts unsuccessfully to heal Will's wound with a spell.
Dr. Malone is visited by Sir Charles, who threatens to use his connections to cut their funding if they do not co-operate with his wishes. Dr. Malone returns at night to follow Lyra's suggestion to communicate with the dark matter using a machine of her invention. The dark matter instructs her to travel through the same window between worlds used by Will and Lyra, and that her role is to "play the serpent".
Lee Scoresby finds Grumman living as a shaman known as Jopari, a corruption of his original name, John Parry, Will's father. Grumman has summoned Scoresby to take him to the bearer of the knife and assist in Lord Asriel's rebellion against the Authority. They set off in Scoresby's hot air balloon but are forced to land by Magisterium soldiers. Scoresby dies holding off the soldiers so that Grumman can complete his task.
Mrs. Coulter tricks Charles into revealing the secret of the knife and kills him. She uses the spectres, which she has learned to control, to torture a witch into revealing the prophecy: Lyra is the second Eve. Mrs. Coulter plans to destroy Lyra rather than risk a second Fall.
Serafina goes to aid Scoresby, having heard his last plea for help, and Will encounters Grumman, who staunches the bleeding in his hand and instructs him in his task. They begin to realise they are long-separated father and son, but a moment later Grumman is killed by a vengeful witch who loved Grumman, who once spurned her love. Will returns to camp to find a pair of angels, Balthamos and Baruch, waiting to guide him to Lord Asriel. He goes to awaken Lyra, but discovers she is missing and her guardian witches have been killed by spectres. Will finds her alethiometer and refuses to go with the angels until he finds Lyra.