As the game begins, the echoes of heavy artillery and explosions can be heard. The game's protagonist, Alex Shepherd, is bound to a gurney and being wheeled through a dilapidated hospital; a silent orderly pushes him down a dimly lit hallway, and they pass by rooms in which some people are committing strange and horrifying acts upon patients. Once wheeled into a room and left alone, Alex struggles with his restraints as the orderly leaves the room and through the blurred glass of the double doors, Alex watches in horror as a mysterious assailant impales the man with a giant blade. After breaking free from his restraints, Alex ventures further through the hospital and he encounters his brother, Joshua Shepherd, drawing with crayons. Upon request, Alex retrieves a rabbit doll for his brother. However, Joshua runs away, as he then continues to do whenever Alex gets close to him. Further progressing through the hospital, Alex follows Joshua's trail into an elevator and during its descent, he hears the screeching of metal and the elevator car shakes violently before a huge blade (alike to the one that impaled the orderly earlier on) is thrust through the door towards him.

Awakening from a nightmare, a startled Alex realizes that it was only a dream as he sits in the passenger seat of an 18-wheeler driven by Travis Grady (the protagonist of Silent Hill: Origins). Arriving at Alex's destination, Travis calls him "soldier". This, along with Alex's military jacket and the sounds of warfare heard in the beginning of the game imply that Alex is a soldier returning home from war. Having been dropped off in his hometown of Shepherd's Glen, Alex discovers that the town is not the same as he left it – thick fog covers the town, all the streets are in a state of heavy disrepair, and almost no people are to be found. Alex encounters Judge Holloway, the mother of his childhood friend, Elle Holloway. Both Alex and Judge Holloway are descendants of the four families that founded Shepherd's Glen hundreds of years ago (Shepherd, Holloway, Fitch, and Bartlett). Shepherd's Glen is, in fact, named after Alex Shepherd's own ancestor. Judge Holloway seems surprised to see Alex, and tells him to go see his mother.

Arriving at his childhood home, Alex notices many pictures of his parents with Joshua which, oddly, do not feature himself. Alex comments to himself about his parents' behavior, feeling that his parents had always favored his brother over him. Alex finds his mother, Lillian, in a near catatonic state. After telling Alex that she misses Joshua, and that his father has gone to look for him, Lillian refuses to speak to Alex any further. Alex notices his father's revolver on his mother's lap and he takes it from her before leaving. Alex suddenly hears a noise from the basement, and heads toward the sound. While investigating the basement, Alex comes across a room that his father, Adam, uses to butcher the animals that he hunts, prompting him to have a flashback. In the flashback, a young Alex opens the door to his father's hunting room, causing his father to turn around and scold him fiercely.

After leaving the house, Alex goes through a town cemetery and then eventually encounters his childhood friend, Elle Holloway, outside of the Police Department putting up missing persons fliers. She is preoccupied and upset, and she seems cross with Alex for leaving for the military without ever saying goodbye to her. After talking with her, she gives Alex a walkie talkie and he continues his search for Joshua. Alex finds his way to a junkyard belonging to Curtis Ackers, the town mechanic, whom he asks for information. Alex gives Curtis his father's revolver in return for information and Curtis gives Alex a handgun claiming that he likes a fair trade. Alex then leaves and heads to the tomb of the Bartlett family, where he finds a watch that emits a noise causing him to blackout.

When he comes to, he finds that he has been mysteriously moved to the neighboring town of Silent Hill. There, he sees his brother run into an abandoned hotel. Following Josh into the building, Alex is stalked by numerous monsters before encountering a humanoid creature with a large, metal, pyramid shaped mask locked over its head - the Bogeyman. The Bogeyman notices Alex, who is hiding behind a shoddy barricade of broken furniture and turns to stare at him briefly before moving on. Alex also encounters a mysterious woman in one of hotel's room. The woman asks to find her memories which are scattered in the hotel. When Alex finds three postcards-memories and gives them to the woman, she grants him a key to a locked room. Inside the room Alex finds Joshua, but they are separated by a hole in the floor. Alex tries to jump over to Josh, but fails and falls down to the ground floor. After this Alex encounters Mayor Bartlett, the mayor of Shepherd's Glen, in a large, circular greenhouse elsewhere in the hotel. Alex learns that Bartlet's son, Joey, has also disappeared mysteriously. After questioning Bartlett, Alex is horrified to see a monster, Sepulcher, rise from a hole in the ground and kill the Mayor. Alex manages to kill it, only to fall into Sepulcher's hole and black out again.

Alex awakes to find himself locked behind bars in a holding cell. The town deputy, Deputy Wheeler, questions him for a while before being convinced of Alex's good intentions and letting him out of the cell. The two make their way through the Shepherd's Glen Police Department building only to be separated. Alex then encounters Elle and they both escape into the sewers where they also eventually become separated. Arriving back on the street, Wheeler radios Alex and tells him to meet up with him so they can find Dr. Fitch, who should know what's going on. Along the street, Alex finds Fitch and follows him into his clinic where Alex finds a slightly disturbing collection of dolls before being attacked by a group of nurse demons. Alex finds a key which unlocks a small box containing another doll and as he touches it, the floors and walls peel away to reveal a rusted, bloody, metal world: the Otherworld or Nightmare World.

Traveling through the Otherworld version of the clinic, Alex finds Dr. Fitch in a large room where he is seen cutting himself to "repent for his sins". Alex questions him and learns that Fitch's daughter, Scarlet, has disappeared as well. Fitch, now going into a state of depression, says that he forgot to bring Scarlet her present. Once Alex hands him his present, Scarlet's doll, Dr. Fitch's cuts proceed to multiply. His blood and the doll then transform into a large monster, Scarlet. The monster kills Fitch by biting his head off, and then attempts to do the same to Alex. After defeating the monstrosity, Alex awakens in the clinic, finding a key that leads him to City Hall.

Arriving at City Hall, Alex proceeds to use the key to unlock an underground passage where he finds a Ceremonial Dagger. He also finds portraits of the town's founders, the heads of four families who left Silent Hill to found Shepherd's Glen many years ago. Oddly, the portrait of the Shepherd family's head, Alex's own ancestor, has been taken down from the wall. Heading back home, Alex discovers that the dagger, aside from being a weapon, is the key that unlocks his father's hunting room door as well as the other doors featuring the same type of lock. In the hunting room, Alex finds a key that unlocks the attic and there, another flashback scene commences. The scene shows Adam Shepherd, Alex's father, giving Joshua their family ring; he tells Josh that the ring has been passed down through generations, is incredibly important and special, and is not to be shown to anyone, even Alex. After the flashback, Alex finds a letter written by his father about the returned Order and the town of Silent Hill. Alex, with the new-found information from his father's note, attempts to question his mother about Joshua once again, only to be interrupted by members of The Order who beat Alex and kidnap Lillian. The house then transforms into an Otherworld version of itself, which Alex escapes by solving puzzles involving the past and guilty consciences of each of his family members.

Escaping the house, Alex meets back up with Elle and Wheeler, stating that they must go to Silent Hill to save everyone. While traveling via boat, The Order assaults them and kidnaps Elle and Wheeler, leaving Alex to wash ashore in Silent Hill. Receiving radio calls from Wheeler, Alex is lead to the penitentiary where he fights multitudes of Order members before rescuing Wheeler. Alex asks if he knows where Elle is and Wheeler says that he doesn't know for sure, but he heard members of the Order talking about taking a woman to the Solitary Confinement block. Traveling deeper into the prison, Alex reaches solitary confinement and instead, finds his mother. Lillian is chained to a crucifix shaped torture device, which is slowly stretching her body beyond its limits. Lillian begs Alex to end her suffering, and the player is given a choice of whether or not to do so. If the player decides not to help her, Lillian is alive and conscious while the torture device tears her body in half. If the player decides to help, Alex mercifully puts a bullet in her brain, killing her right before the machine tears her body apart.

Alex meets back up with Wheeler, and they proceed to travel through the Otherworld version of the penitentiary, finding Elle's mother, Judge Holloway, strapped to a chair. Alex releases her, but a terrible monster grabs Wheeler through a hole in the wall and pulls him in prompting the Judge to run. As she leaves, the Judge's face changes from a feigned expression of fright to reveal a more sinister intent. Alex defeats the monster, Asphyxia, and sees his Joshua, whom he follows outside and into a Church. Inside, the player encounters a shadowy man in a confession booth. The conversation between Alex and the mysterious figure implies that it is Alex's father, or his conscience, asking for forgiveness for the way that he and his wife have always treated Alex. The figure also speaks more of having been given a choice between his two sons. He says that he and his wife have always loved their son, but that they couldn't show him. They couldn't let him see the wonderful things in life, like love and laughter. The player is then given a choice of whether to forgive this person or not. After solving a puzzle to reveal a door behind an enormous pipe organ, Alex finds his father, Adam, tied up, similar to how he found his mother in the prison.

Alex begins questioning his father as to whether or not he knows where Joshua is and it is revealed that Alex was never a soldier. While he thought that he was in the hospital due to wounds sustained during the war, Alex has actually been in a mental institution. Adam shows Alex the family ring necklace, but does not explain why he has apparently taken it back from Joshua. The Bogeyman appears and slices Adam's body in half before retreating down a staircase. Following after the Bogeyman, Alex is soon captured by the Order.

Alex awakens to find himself tied to a chair in a large, blood-stained room. Sitting in the room is Judge Holloway, who reveals that the disappearances of all the children were all part of a ritualistic sacrifice system. She reveals that Shepherd's Glen was founded by four families from Silent Hill, who no longer wanted to take part in the doings of the Order and their demon worship. They were allowed to leave Silent Hill under one condition: every fifty years each of the four families must sacrifice one of their children. This sacrifice has since provided protection to Shepherd's Glen from the troubles that have been felt in Silent Hill, until now. Holloway reveals that the protection is no longer there because, while three of the families made the sacrifice recently, one family, the Shepherds, failed to do so. Mayor Bartlett sacrificed his son, Joey, Dr. Fitch sacrificed his daughter, Scarlet, and Judge Holloway sacrificed her daughter, Nora. Adam Shepherd was supposed to sacrifice one of his boys, but he didn't do so. Because of this, the protection from the Order's "god" is no more. Holloway goes on to say that there is no longer any choice for the town but to return to the old ways of the Order and Silent Hill. Therefore, she and her fellow faithful have been kidnapping, torturing, and murdering everyone in Shepherd's Glen that refuse to go along with them. Holloway then begins to torture Alex by running a drill into his thigh and fortunately, he breaks free from his restraints, and turns the drill to Judge Holloway's throat, killing her.

After running through the Order's compound for a while, Alex finally finds Elle, who is being tortured by Curtis. He manages to kill her assailant and frees her. They then find Wheeler tied to a chair with several knives protruding from his abdomen. The player is given a choice of whether or not to save him with a medical kit or to let him die. Regardless of the choice made, Alex then goes on without Elle to face the end alone. Alex pushes further through, finding the tombs of the four families who's children have been sacrificed throughout the years. On each of the tombs are four names: those of the children who have been sacrificed by each family over the years since the town's founding. On the Shepherd family tomb, Alex finds his own name, confirming that his parents chose to sacrifice him and let Joshua live, which explains why his parents were so distant and cold toward him, and favored Joshua; they couldn't bear to love Alex knowing that they would have to kill him one day.

Alex has a flashback: on the night after Adam gave Joshua the family ring, Alex took Joshua out on a boat on Toluca Lake. While there, Alex teased him, whom he obviously felt jealous of due to his parents' preferential treatment. To counter Alex's taunts, Josh showed him the family ring, prompting Alex to grab it in anger. Josh stood up in the boat, attempting to take the ring back, however, he fell backwards while struggling with Alex and had a concussion on the boat before falling into the lake and drowning. Adam then retrieved Josh's body, and Alex went into mental shock, repeating over in his mind that there was a way he could save Joshua, despite that he was dead. Adam then scolded Alex fiercely, telling him that he doesn't know what he's done. He says that they chose Alex, but now Alex has ruined everything. He says that everyone else will suffer for Alex's mistake. It is implied that many people in the town were told that Alex went off to war rather than that he was institutionalized, as Elle scolds him earlier in the game for not saying goodbye. The world once again shifts to the Otherworld where Alex fights the final boss, Amnion. After defeating the creature, Alex cuts the monster open, and Josh's corpse slides out. Finally finding closure with his brother, Alex laments and apologizes to Josh and leaves.

Depending on the player's actions throughout the game, five different endings can be unlocked.