Tottington Hall's annual Giant Vegetable Competition is approaching. The winner of the competition will win the coveted Golden Carrot Award. All are eager to protect their vegetables from damage and thievery by rabbits until the contest, and Wallace and Gromit are cashing in by running a vegetable security and humane pest control business, "Anti-Pesto".

However, they are soon faced with two problems: first is Wallace's growing weight, while the second is inadequate space for the captured rabbits. Wallace comes up with an idea – use his Mind Manipulation-O-Matic machine to brainwash the rabbits. While performing the operation, Wallace accidentally kicks a lever and a rabbit gets fused to Wallace's head, causing the machine to malfunction, and Gromit is forced to destroy the Mind-O-Matic in order to save Wallace. The resulting failure somehow leaves them with a semi-intelligent rabbit who no longer has an appetite for vegetables, whom Wallace dubs "Hutch". That night, town is threatened by the "Were-Rabbit", a giant rabbit-like monster which eats vegetables of any size. During a chaotic town meeting, Anti-Pesto enters into a rivalry with Lord Victor Quartermaine, who seeks to court Lady Tottington and who believes that it is better to be rid of the rabbits via the use of guns. With Lady Tottington's persuasion, the townspeople agree the Anti-Pesto front the capture attempt.

After a hectic night-time chase, Wallace and Gromit come to the theory that Hutch is the Were-Rabbit. Believing he has captured the beast, Wallace is overjoyed and goes to inform Lady Tottington. Securing Hutch to make sure that he does not escape, Gromit instead discovers that the Were-Rabbit is in fact Wallace, suffering from the effects of the accident, with the Mind Manipulation-O-Matic having caused him and Hutch to each take on aspects of the other. Alarmed, Gromit seeks out Wallace, retrieves him before the sun sets, and drives him away. Victor corners Wallace during the night, jealous of Lady Tottington's growing fondness for him because of his humane practice of pest control. However, when the full moon appears, Wallace transforms into the Were-Rabbit before a petrified Victor and his dog Philip, forcing Gromit to pursue him. Having identified the Were-Rabbit, Victor decides to dispose of his rival to win Lady Tottington's heart. Reverend Clement Hedges allows him access to three "24-carrot" gold bullets – supposedly, the only things capable of killing a Were-Rabbit.

The following morning, the day has finally arrived for the Vegetable Competition, but Lady Tottington reluctantly bows to public pressure to sanction Victor's offer to shoot the Were-Rabbit. Meanwhile, an oblivious Wallace rebuffs Gromit's accusations of him being the Were-Rabbit, but accepts the truth when he witnesses Hutch expressing his own personality traits. At night, Lady Tottington informs Wallace of Victor's plan. But seeing the moon rising in the sky above he and Lady Tottington, Wallace begins to transform and is left with no other choice but to send her away. Victor and Philip arrive on the duo's doorstep moments later, but Gromit lures the Were-Rabbit away with a female Were-Rabbit marionette. However, his getaway plan is foiled when Victor mistakenly fires upon what he believes to be the Were-Rabbit, instead discovering it to be Gromit in disguise. Victor and Philip imprison Gromit, who subsequently escapes with help from Hutch and decides to use the marrow he had been growing for the competition as bait for Wallace who has burst in upon the vegetable contest. Victor exhausts his supply of gold bullets and takes the Golden Carrot award from Lady Tottington, as it is the only golden bullet-like object left to him. Ascending to the rooftops, Wallace takes Lady Tottington with him and indirectly reveals his identity to her, but Victor interrupts them and reveals that he only wants to court Lady Tottington for her money.

Meanwhile, Philip pursues Gromit to prevent him from stopping Victor, both using toy biplanes, but Philip's plane is destroyed and Gromit eventually dispatches him into a bouncy castle. On the roof of Tottington Hall, Victor wields the Golden Carrot trophy inside an elephant gun and tries one last time to shoot Wallace, but Gromit saves him by grabbing onto a rope from a flagpole and swinging his plane into the path of the improvised bullet. However, the toy plane rapidly descends when Gromit accidentally lets go of the rope. Wallace sacrifices himself to save Gromit, breaking Gromit's fall into the cheese tent below. Victor gloats victoriously, but Lady Tottington knocks him into the tent, where Wallace is dying of his injuries. Using the marionette to protect Wallace from the angry mob outside, Gromit dresses Victor up as the monster and the angry mob chases Victor away.

Gromit and Tottington tend to Wallace who seemingly dies, but morphs back into his normal, naked form. Gromit, however, is able to revive Wallace with the scent of a slice of Stinking Bishop cheese. For his and his marrow's bravery, Gromit is awarded the slightly dented Golden Carrot trophy, and Lady Tottington turns Tottington Hall's front garden into a wildlife sanctuary, where Hutch and the rest of the rabbits can live in peace.