Burton originally did not want to direct a sequel because of his mixed emotions toward the previous film. Daniel Waters delivered a script that satisfied Burton; Wesley Strick did an uncredited rewrite, deleting the character of Robin and rewriting the climax. Filming started at Burbank, California in June 1991. Batman Returns was released to financial and critical success, though it caused some controversy for being darker than its predecessor.

A hideously deformed baby boy is born to a wealthy aristocratic couple, who–after a short-lived attempt to cope with their child's unnatural deformity–decide to dispose of the infant into the sewers beneath the Gotham Zoo, where he is found and raised by a group of penguins.

Thirty-three years later, business tycoon Max Shreck (Christopher Walken) proposes to build a new power plant to save Gotham City from a possible power failure in the future, although the Mayor and other city officials question Shreck's motives. Meanwhile, during a public speech from Shreck, a group of rogue circus clowns, known as the Red Triangle Gang, disrupt the gathering, setting many buildings afire. Shreck escapes and falls into the sewers and is introduced to the legendary Penguin (Danny DeVito), the deformed boy, now an adult, who blackmails Shreck with incriminating evidence of past crimes into helping him emerge from the sewers to become a public hero. Shreck accepts, planning to use the penguin-man to his own advantage.

Shreck discovers that his secretary, Selina Kyle (Michelle Pfeiffer), has learned the true nature of his proposed power plant: it will drain and store the power of Gotham City and make a huge profit for the Shreck family. Shreck attempts to kill Selina by pushing her out of the window of the office, but she survives the fall, though unconscious. Mysteriously revived by alley cats, she goes back home and causes great destruction out of sudden insanity. She then becomes Catwoman, making her costume from a leather coat and dedicating her life to feminism in an exceedingly aggressive manner.

Meanwhile, Penguin, with the help of a Red Triangle acrobat, stages a kidnapping of the Mayor's infant son into the sewers, where the child is subsequently "rescued" by Penguin. Now a media sensation, Penguin is granted private access into the Hall of Records to discover his parents' identity and learn his real name: Oswald Chesterfield Cobblepot. He publicly forgives his now-deceased parents for abandoning him, and wins the sympathy of the public, except for Bruce Wayne (Michael Keaton), who is skeptical of Penguin's heroics and eventually links Cobblepot to several child disappearances over the past few years. Bruce soon realizes that Cobblepot is the leader of the Red Triangle gang and attempts to confront Shreck with his suspicions during an intended business meeting. However, Shreck, who is in on Cobblepot's plans, takes offense at Bruce's accusations, and bluntly dismisses Bruce from his office.

Shortly thereafter, Shreck hatches a plan with Cobblepot that would exploit the gang's past crimes to defame the Mayor and propose a recall election, making Cobblepot the ideal replacement candidate. During the next attack by the Red Triangle gang, Catwoman runs into Batman and Penguin, after having destroyed a part of Shreck's department store. Batman pursues her atop a building, and the two fight. Catwoman overcomes Batman and casually threatens his life while dangling him off a high ledge with her whip. During this opportune moment, Batman throws at her a concealed chemical vial from his utility belt and knocks her off the building, where she lands safely but injured into a kitty-litter-filled truck bed leaving the area.

Catwoman joins forces with Penguin to devise a plan to frame Batman and destroy him; at the same time, Selina begins a romantic relationship with Bruce Wayne. While Bruce and Selina are sharing a passionate moment at Wayne Manor, an unexpected news bulletin catches their attention in which the beautiful holiday Ice Princess (Cristi Conaway), is abducted, with Batman as the main suspect. Both Selina and Bruce abruptly cancel their evening plans and part ways, unaware that they're both going to the same destination. Bruce, as Batman, heads to rescue the Princess and clear his name, but is met with both the Penguin and Catwoman. The confrontation on the building rooftop ends with Penguin killing the princess, and the public below believing Batman was responsible. When Batman tries to escape, he discovers that the Batmobile has been sabotaged and that Penguin has remote control over its operation. During the destructive rampage throughout the city while trying to evade the police, Batman pinpoints the remote transmitter overriding the Batmobile and removes it, all the while recording Cobblepot's callous remarks about the city and the naiveté of its people. Batman narrowly escapes the police and returns to Wayne Manor with the Batmobile heavily damaged. Penguin seeks to celebrate his victory with Catwoman, but the alliance soon ends when she rebuffs a sexual advance from him, which leads to Penguin using his flying umbrella to drop her into a Greenhouse below to leave her for dead.

The following day, Bruce Wayne uses his radio machinery at the Batcave to interrupt Cobblepot's campaign speech and play back the harsh, subversive statements made about Gotham, revealing Cobblepot's treachery. After hearing the recording, the crowd heckles and condemns Cobblepot, forcing him to retreat to the sewers after Shreck also abandons him. Enraged, Cobblepot reverts to his master plan: to abduct and murder all the first-born sons of Gotham City using information he acquired from the Hall of Records. At a ball hosted by Shreck in which Bruce and Selina meet and accidentally discover their dual identities, Penguin makes an unexpected entrance by exploding the glass center of the floor and announces his plan, with Shreck's son Chip to be the first victim. Shreck insists on being taken instead, and Penguin reluctantly agrees. In the meantime, Batman stops Penguin's men from kidnapping the children and learns of Penguin's sewer hideout. Angered at being foiled once again, Penguin instead plans to destroy Gotham completely using his (real) penguins to fire missiles into the heart of the city. Batman, with help from his butler Alfred (Michael Gough), jams the penguins' communicators and makes them return to the sewers.

Penguin attempts to flee from the sewer through the zoo, but Batman catches up with him and they fight until Batman tricks him into firing all the penguins' missiles at the abandoned zoo. In the fray, Penguin is attacked by bats that were hidden inside Batman's watercraft and falls through the glass ceiling, plummeting into the toxic waste-contaminated pool in which he planned to drown Gotham's children. Meanwhile, Schreck escapes but is ambushed by Catwoman. Batman intervenes by removing his mask to talk Catwoman out of her desire for vengeance, and although she claims that she does indeed love him, she refuses to listen, claiming that she "Just couldn't live with herself." Shreck pulls out a gun and shoots Batman, then shoots Catwoman, but continues to shoot at her three more times since she does not fall from the wounds. Claiming she has two lives left, she ignites an electrical surge that kills Shreck and destroys the giant air-conditioning/cooling system within the lair. Batman, who was wearing body armor, tries to find Selina in the wreckage, but only finds Max Shreck's charred corpse. Meanwhile, a fatally-injured Penguin emerges from the toxic water and tries to shoot Batman from behind using one of his umbrellas, but picks up the wrong one, choosing "The Cute One" which he planned to use to lure Gotham's children into the pool. With his last few breaths he declares that he thirsts for some ice water, then collapses and dies. Three Emperor penguins and three King penguins gather around him, in a fashion similar to pallbearers, to push his corpse into the water.

On the way back home, Bruce glimpses Catwoman's shadow in an alley and looks for her, but only finds a cat. He subsequently takes the cat home with him, wishing Alfred a Merry Christmas. In the distance, the Bat-Signal lights up in the night sky and Catwoman's silhouette is seen glaring up towards the glowing emblem, as if to taunt Batman once again.