The Hound of the Baskervilles opens with a mini mystery—Sherlock Holmes and Dr. Watson speculate on the identity of the owner of a cane that has been left in their office by an unknown visitor. Wowing Watson with his fabulous powers of observation, Holmes predicts the appearance of James Mortimer, owner of the found object and a convenient entrée into the baffling curse of the Baskervilles.

Entering the office and unveiling an 18th century manuscript, Mortimer recounts the myth of the lecherous Hugo Baskerville. Hugo captured and imprisoned a young country lass at his estate in Devonshire, only to fall victim to a marauding hound of hell as he pursued her along the lonesome moors late one night. Ever since, Mortimer reports, the Baskerville line has been plagued by a mysterious and supernatural black hound. The recent death of Sir Charles Baskerville has rekindled suspicions and fears. The next of kin, the duo finds out, has arrived in London to take up his post at Baskerville Hall, but he has already been intimidated by an anonymous note of warning and, strangely enough, the theft of a shoe.

Agreeing to take the case, Holmes and Watson quickly discover that Sir Henry Baskerville is being trailed in London by a mysterious bearded stranger, and they speculate as to whether the ghost be friend or foe. Holmes, however, announces that he is too busy in London to accompany Mortimer and Sir Henry to Devonshire to get to the bottom of the case, and he sends Dr. Watson to be his eyes and ears, insisting that he report back regularly.

Once in Devonshire, Watson discovers a state of emergency, with armed guards on the watch for an escaped convict roaming the moors. He meets potential suspects in Mr. Barrymore and Mrs. Barrymore, the domestic help, and Mr. Jack Stapleton and his sister Beryl, Baskerville neighbors.

A series of mysteries arrive in rapid succession: Barrymore is caught skulking around the mansion at night; Watson spies a lonely figure keeping watch over the moors; and the doctor hears what sounds like a dog's howling. Beryl Stapleton provides an enigmatic warning and Watson learns of a secret encounter between Sir Charles and a local woman named Laura Lyons on the night of his death.

Doing his best to unravel these threads of the mystery, Watson discovers that Barrymore's nightly jaunts are just his attempt to aid the escaped con, who turns out to be Mrs. Barrymore's brother. The doctor interviews Laura Lyons to assess her involvement, and discovers that the lonely figure surveying the moors is none other than Sherlock Holmes himself. It takes Holmes—hidden so as not to tip off the villain as to his involvement—to piece together the mystery.

Mr. Stapleton, Holmes has discovered, is actually in line to inherit the Baskerville fortune, and as such is the prime suspect. Laura Lyons was only a pawn in Stapleton's game, a Baskerville beneficiary whom Stapleton convinced to request and then miss a late night appointment with Sir Charles. Having lured Charles onto the moors, Stapleton released his ferocious pet pooch, which frightened the superstitious nobleman and caused a heart attack.

In a dramatic final scene, Holmes and Watson use the younger Baskerville as bait to catch Stapleton red-handed. After a late supper at the Stapletons', Sir Henry heads home across the moors, only to be waylaid by the enormous Stapleton pet. Despite a dense fog, Holmes and Watson are able to subdue the beast, and Stapleton, in his panicked flight from the scene, drowns in a marshland on the moors. Beryl Stapleton, who turns out to be Jack's harried wife and not his sister, is discovered tied up in his house, having refused to participate in his dastardly scheme.

Back in London, Holmes ties up the loose ends, announcing that the stolen shoe was used to give the hound Henry's scent, and that mysterious warning note came from Beryl Stapleton, whose philandering husband had denied their marriage so as to seduce and use Laura Lyons. Watson files the case closed.