The film begins when a couple disappear while having a romantic night out on a yacht near the Pacific Northwest resort community, Grave's Point. The next day, local fisherman Whip Dalton (William Petersen) finds the empty lifeboat from the missing yacht and finds a large claw stuck into the boat. Whip sends the claw to a university to be analyzed and it ends up in the hands of marine biologist Dr. Herbert Talley (Ronald Guttman), who comes to Grave’s Point claiming it is from the tentacle of a Giant squid. The island harbor master Schuyler Graves (Charles Martin Smith) tries to hire Whip to kill the squid, but he refuses, so Graves sends out Lucas Coven (Larry Drake) instead. Coven succeeds in slaying the squid and the carcass is promptly sold by Graves to Sea Land Texas owner Osborne Manning (Denis Arndt) then unknown to the fishermen the sonar that isn't being watched detects another squid. It turns out the squid is much bigger than the one they killed and instead of following the boat or attacking, it resubmerges.
When young history professor Russ is called upon by his sister to execute their late mother's estate, he is reunited with boyhood friend Mike, and with his father, the charismatic leader of a New Age cult. While exploring his memories, Russ wanders into a warehouse where hundreds of names are listed on the walls. As he sleeps that night, he dreams of a stone cudgel and awakens to find a cudgel in his motel room; the town drunk warns him that it is an instrument of sacrifice. A young liquor store clerk enlists him to help find her brother, whom she believes has been taken by the cult. Russ's aunt, who has been living in an asylum, tells him that his mother left a message hidden in her house.
During the Cuban Missile Crisis, a Russian sub is sunk while en route to Havana. As the sub goes down, the hold is breached and barrels full of some mysterious substance tumble out. Years later, an American nuclear submarine is transporting a captured terrorist to the States. The terrorist's henchmen, however, are planning to hijack the sub and rescue their leader. Meanwhile, a large mutated octopus is approaching the sub at high speed.