In the summer of 1958, local boy Danny Zuko (John Travolta) and vacationing Sandy Olsson (Olivia Newton-John) meet at the beach and fall in love. When the summer comes to an end, Sandy—who is going back to Australia—frets that they may never meet again, but Danny tells her that their love is "only the beginning". The film moves to the start of the seniors' term at Rydell High School. Danny, a greaser, is a member of the T-Birds, consisting of his best friend Kenickie (Jeff Conaway), Doody (Barry Pearl), Sonny (Michael Tucci), and Putzie (Kelly Ward). The Pink Ladies, a popular clique of girls, also arrive, consisting of Rizzo (Stockard Channing), Frenchy (Didi Conn), Marty (Dinah Manoff), and Jan (Jamie Donnelly).
After her parents decide not to return to Australia, Sandy enrolls at Rydell and is befriended by Frenchy, who considers dropping out of school to become a beautician. Unaware of each other's presence at Rydell, Danny and Sandy tell their respective groups the accounts of events during the pair's brief romance, without initially mentioning the other's name. Sandy's version emphasizes the romance of the affair, while Danny's version is more sexual (and therefore presumably less honest).
When Sandy finally says Danny's name, Rizzo arranges a surprise reunion for the two, but Danny is forced to maintain his bad-boy attitude in front of his pals, upsetting Sandy, who storms off. Frenchy invites the girls to a pajama party, but Sandy falls ill from trying a cigarette and drinking. The T-Birds almost crash the party in Kenickie's Greased Lightning car, but a guilty Danny leaves, followed by Rizzo, who departs to make out with Kenickie, who later becomes her boyfriend.
The two are disturbed by Leo (Dennis C. Stewart), leader of the T-Birds' rival gang, the Scorpions, and his girlfriend Cha-Cha (Annette Charles), leading to a planned car race between Leo and Kenickie. In an attempt to impress Sandy, Danny turns to Coach Calhoun (Sid Caesar) to get into sports, eventually becoming a runner. He reunites with Sandy and they attempt to go on a date, but their friends crash it, resulting in Kenickie and Rizzo arguing and parting. Left alone, Frenchy is visited by a guardian angel (Frankie Avalon) who advises her to return to school after a mishap in beauty class leaves her with candy-pink hair.
The school dance arrives, broadcast live on television and hosted by DJ Vince Fontaine, (Edd Byrnes) who flirts with Marty. Rizzo and Kenickie attempt to spite one another by bringing Leo and Cha-Cha as their dates, while Danny and Sandy arrive together. They dance well and are expected to win, but just before the winners are announced they are separated by Sonny, and Danny and Cha-Cha (who were once boyfriend and girlfriend) end up performing together and winning.
Danny tries to make it up to Sandy by taking her to a drive-in theater but makes a clumsy pass at her, causing Sandy to flee. Meanwhile, Rizzo fears she is pregnant after missing a period and confides in Marty, but Marty tells Sonny and he inadvertently spreads the rumor to Kenickie, the apparent father, though Rizzo denies this to him.
The race arrives, but Kenickie is knocked out by his own car door thanks to the careless behavior of his friend Putzie, so Danny takes up the challenge. He and Leo race until Leo crashes and leaves humiliated, with Danny as the victor. Sandy watches from afar, concluding she still loves Danny, and decides to change her attitude and look to impress him. On the last day of school, while Principal McGee (Eve Arden) and her assistant Blanche (Dody Goodman) sob about the departing class, the class celebrates their graduation at the fair on the school grounds.
Rizzo discovers she is not pregnant after all and reunites with Kenickie. Danny has become a jock, but is shocked when Sandy appears dressed in leather and is seen smoking. In song, the two admit they love each other and reunite.
The film ends with Danny and Sandy departing in the Greased Lightning car together, which takes flight, and the pair wave goodbye to their friends. The film ends with credits in the style of a yearbook.