At the start of the game, the player controls Alex through a nightmare concerning his younger brother, Josh, before Alex wakes up in the cab of a truck driven by Travis Grady, the protagonist from Silent Hill: Origins, who gives him a ride to his hometown of Shepherd's Glen. The town, named for a distant ancestor who helped found it, is covered in fog and deserted. At home, he finds his mother in a catatonic state, murmuring about his father leaving to find Josh; promising to find Josh, Alex leaves.
Alex soon discovers that many more people have gone missing in Shepherd's Glen since he left when he finds his childhood friend Elle Holloway pinning "missing" signs to a board outside the police department. As Alex explores the town, he witnesses the separate deaths of Mayor Bartlett and Dr. Fitch by monsters in the Otherworld, both of whom have a child who is missing. Back in Shepherd's Glen, Alex allies himself with Deputy Wheeler in the police department. Alex eventually learns that his father was involved in the secrets of the town and had left to attempt to resolve the town's problems, but before he is able to get answers from his mother at home, he is knocked unconscious when The Order—a religious cult from Silent Hill which has been taking people from the town— kidnaps his mother.
Alex, Elle, and Wheeler take a boat across Toluca Lake to find Alex's father in Silent Hill but are intercepted by the Order. Elle and Wheeler are taken to Silent Hill's penitentiary, where Alex attempts to rescue them. He finds his mother bound; the player must make a decision regarding whether to kill her out of mercy or not, which will affect the outcome of the game. After rescuing Elle's mother, Judge Holloway, and separating from Wheeler once more, Alex finds the Order's church, where he listens to his father in the confessional; the player may choose to forgive him, again affecting the outcome of the game. Alex later runs into his father, who reveals that Alex was never a soldier and has been in a mental hospital since "the accident" occurred. He begs forgiveness before he is killed by a monster called the Bogeyman (Pyramid Head from Silent Hill 2).
Continuing to the Order's underground facility, Alex is captured by Judge Holloway, who reveals that everything that has happened is due to a broken pact. One hundred and fifty years ago, the four founding families broke away from Silent Hill's Order to move to Shepherd's Glen. They were allowed to do so on the condition that once every 50 years they would sacrifice one of their children in a preordained fashion. On this occasion, while Joey Bartlett, Scarlett Fitch and Nora Holloway were successfully sacrificed by their parents, the Shepherd sacrifice failed, and as a result, the Order had been reformed to try to appease their god. Judge Holloway tries to kill Alex, who kills her in self-defense. Alex rescues Elle from the facility and, after finding Wheeler injured and allowing the player to choose whether to save him—once more affecting the game's ending—continues on alone to find Josh.
Realizing he was the intended sacrifice, Alex experiences a flashback showing Josh's true fate. When Alex was younger, he had taken Josh rowing out on the lake, where Josh showed Alex a ring, which his father had chosen to give to him instead of Alex. Out of jealousy, Alex struggled with Josh to try to take the ring, and as they fought Josh accidentally fell into the lake and drowned. His father retrieved the body and explained that Alex had "ruined it for all of us", since he had chosen Alex, and not Josh; unable to accept Josh's death, Alex was then sent to the mental hospital, and with Josh instead of Alex sacrificed, the Order's pact was broken. After fighting the final boss, the manifestation of Josh's spirit, Alex finally has the chance to apologize and states that he never wanted Josh's death. Alex leaves the family ring and their father's angle-head army flashlight on Josh's body and exits the chamber.
There are five endings available, which depend on the player's actions during the game, including whether the player kills Alex's mother, forgives Alex's father, and saves Deputy Wheeler. These range from the single positive ending to the game—where Alex comes to terms with his past actions and reunites with Elle to leave Shepherd's Glen—to three other endings: Alex getting drowned by his father, waking up in the hospital and receiving a shock treatment, or being turned into a Bogeyman. There is also a joke ending, where both Alex and Elle are abducted by a UFO while Wheeler witnesses. In addition to these endings, if the player collects all of Josh's pictures or clears the game on the "hard" difficulty, a first-person post-credits scene is played where Alex finds Josh sitting on the bottom bunk of his bed and Josh takes a picture of Alex with a camera.