Outside a London pub, an elderly bearded sage named Doctor Parnassus runs a nearly-bankrupt traveling theatre troupe, which includes his teenaged daughter Valentina, a sleight-of-hand expert and barker Anton, and a dwarf assistant Percy. The troupe's main attraction is a portal to a magical "Imaginarium", a surreal dream world that transforms according to its participants' own desires and offers them a choice between difficult self-fulfillment or easy ignorance. After a drunkard is swayed to the latter, Parnassus says he has lost "another one" to Mr. Nick, a suave personification of the Devil, who often appears without warning to taunt Parnassus and gloat over Parnassus's failures. He reminds Parnassus that in three days Valentina turns 16, and her soul will belong to Mr. Nick. Hundreds of years ago, Mr. Nick tricked Parnassus into accepting immortality, after making a wager similar to his current predicament.

As the troupe crosses a bridge, Anton notices someone hanging beneath it. After they rescue the man and revive him, he spits out a golden pipe that allowed him to continue breathing while being hanged; unwilling to explain his past, the man convinces his rescuers that he has amnesia. Parnassus sadly contemplates the impending loss of his daughter, and Mr. Nick visits him, revealing the identity of the rescued man: a disgraced philanthropist named Tony Shepard, who was being hanged by Ukrainian gangsters for owing them money. Mr. Nick also offers Parnassus a new wager: Valentina can stay with Parnassus past the age of 16 if Parnassus can win five souls to the path of self-fulfillment before Mr. Nick can win five souls to the path of ignorance, all within the universe of the Imaginarium.

The newcomer Tony soon joins the troupe as a barker even more charismatic than Anton, who is becoming suspicious. Tony convinces the troupe to remodel the show into a more modern act. While performing, Tony lures a posh, affluent woman into the Imaginarium and follows her, where they enter a pastel-colored dream-world representing the woman's imagination. The woman's imagination also changes Tony's face to one of her likings; Tony dances elegantly with her, and they notice a motel run by Mr. Nick, but Tony convinces the woman instead to take a gondola ride that wins the first soul for Parnassus. Tony falls back out of the Imaginarium, returning his face to normal. The woman exits shortly after and gives the troupe a vast sum of money as thanks for her marvelous experience. When three other women enter, each re-emerges elated; and thus Parnassus has won a total of four souls. However, Mr. Nick easily takes the souls of four Ukrainian gangsters looking to hunt Tony down for his debts. They chase Tony into the Imaginarium and quickly fall into a trap laid by Mr. Nick. Thus, the score is tied: four to four.