Sarah Williams is a dreamer, a young girl obsessed with fantasy and playing dress-up. The movie opens with a scene of Sarah rehearsing lines from her book Labyrinth in the park. Sarah lets her imagination take her into her own world and loses track of time, forgetting that she must babysit her baby half-brother, Toby, that night. In a flurry, she runs home only to find her angry stepmother waiting at the front door for her. Sarah has an argument with her, the stepmother leaves with Sarah's father for their date, and Sarah is left to babysit Toby. Already in a state of anger, Sarah realizes her treasured stuffed bear, Lancelot, is missing from her room. Storming into Toby's room, she finds Lancelot and yells at Toby. He begins to cry, and Sarah tries to quiet his screaming by rehearsing more lines from Labyrinth. The part of the story she cites tells of a young woman granted special powers by the king of the goblins. It tells of how the girl could no longer stand her life and wishes for goblins to take away her screaming baby brother. As she ends the story and turns out the light, she says, "I wish the goblins would come and take you away...right now." Toby's crying suddenly stops. Worried, Sarah enters his room to find Toby has vanished.

A barn owl flutters through the opened window and transforms into the goblin king Jareth (David Bowie) and tells her he has taken the baby as she had beseeched. Appalled at the realization of what she had done, she begs for the return of her brother. He gives her 13 hours in which to solve the Labyrinth and find Toby; or he will keep him forever.

The Labyrinth is not a simple maze. It is its own world, riddled with logic-puzzles and tests. She first meets Hoggle, a small dwarf, spraying fairies with pesticide outside the entrance. She bribes him with plastic jewelry to lead her through the maze. Though he will eventually side with Sarah, it is later discovered that he is a half-hearted spy working for Jareth. Her other companions along the way are Sir Didymus, a chivalrous fox-knight who rides a sheepdog called Ambrosius; lives at The Bog of Eternal Stench and guards a bridge to uphold a sacred oath; and Ludo, a giant, gentle beast she rescues from some of Jareth's goblins. After a variety of adventures, including an encounter with detachable-limbed revelers known as "The Fire Gang", who try to remove Sarah's head; a detour through the Bog of Eternal Stench; a stop at the Four Guards, where she must solve a Raymond Smullyan inspired Knights and Knaves logic puzzle to avoid certain death; a junkyard recreation of her own bedroom; and a hallucinogenic-peach induced masquerade ball, Sarah makes her way into the castle beyond the goblin city.

The film climaxes in Jareth's multi-dimensional M. C. Escher-inspired castle, wherein he makes a final appeal for her to abandon her quest and stay with him as his queen. She rejects him at the last moment, echoing the lines she originally could not remember when trying to rehearse the lines of Labyrinth: "You have no power over me". The room crumbles away and Sarah finds herself in the front hall of her home with the clock striking midnight and the barn owl (Jareth) flying away.

In her room, she collects some of her toys, then returns to Toby's room to give him Lancelot. Whilst clearing her dresser off, confused regarding whether this was the turning point in her life between growing up and remaining a child, Hoggle appears along with Ludo and Sir Didymus, as images in the mirror. They seem to be bidding her good-bye as she leaves behind the fantasies of childhood, but remind her that they will still be available "should you need us." Sarah, however, insists that even as she grows up, she will still need them, and the film closes as the Labyrinth creatures celebrate Sarah's refusal to give up her imagination. Outside, the Jareth owl watches the party for a while, then flies away into the night.

David Bowie as Jareth, the Goblin king: He is the king of the Labyrinth, a vast kingdom within a realm known as The Underground, though not literally under the ground. His powers include the ability to form crystal orbs in his hands which can create illusions of all types or to view things from a distance. He can transform into a barn owl at will. He appears human but he has quite a few magical abilities and he does not age between the film Labyrinth and the Return to Labyrinth manga. It is very likely that Jareth is a type of faery. The likelihood of Jareth being a faery is the result of character traits given to Jareth by conceptual artist, Brian Froud, well known for his art involving faeries and faery creatures. David Bowie's character is seen to contact juggle throughout the film. These manipulations were actually performed by renowned juggler Michael Moschen, who stood behind Bowie during filming.
Jennifer Connelly as Sarah Williams: The character of Sarah is the protagonist of Labyrinth. She is fifteen years old and loves fantasy stories. Her journey through the Labyrinth becomes one of spiritual, moral and psychological evolution for her. In the music video for "As the World Falls Down," a slightly older Sarah pines for her adventures within the Labyrinth as Jareth pines for her. The two never seem quite willing to go to each other.
Toby Froud as Toby Williams: Toby is the baby Jareth kidnapped when Sarah wished for her baby brother to be wished away. Through the course of his time in Jareth's care it appeared that Jareth actually became attached to Toby and made comments to the extent of 'He's a lively little chap, I think I'll call him Jareth. He's got my eyes.' For a time it appeared that Jareth had wanted to turn Toby into a Goblin, as evidenced by his earlier line: 'Before your baby brother becomes one of us forever.' Toby is the half-brother of Sarah Williams (they share the same father). His mother is Irene Williams while Sarah's mother was Linda Williams (Sarah's father's first wife). Conceptual artist Brian Froud's infant son Toby (also named Toby) played Sarah's brother in the movie.
Linda Williams: Only seen in the photographs in Sarah's bedroom and mentioned in the novelization, Linda Williams is Sarah's biological mother. She showed signs of being bipolar and was a passionate actress. She had an affair with a co-star, Jeremy (who may or may not have been Jareth in disguise) and left Sarah and her father. Sarah's father re-married a woman named Irene and together they had Sarah's half-brother, Toby.
Shelley Thompson as Irene Williams: Irene was never mentioned by name in the film Labyrinth and many fans dubbed her 'Karen' though in 2006 she was officially named Irene by the Henson Company. Irene is very prudish and believes things should be normal, proper and acceptable; though not really a terrible person, Sarah resents her, as does Toby in the 'Return to Labyrinth' manga.
Christopher Malcolm as Mr. Williams: A somewhat wooden character, he only appeared briefly in the film as Toby and Sarah's father.
Shari Weiser and Brian Henson (voice) as Hoggle: Hoggle is a cowardly dwarf-goblin that works for Jareth but becomes loyal to the sweet-natured Sarah. Hoggle gets irritated when Jareth gets his name wrong, repeatedly, which appears to deliberately be done on purpose to annoy him. Jareth threatened Hoggle that if Sarah ever kissed him, he would become "The Prince of the Land of Stench"; there is some implication that Hoggle may have been developing romantic feelings for Sarah, and Jareth's peculiar threat could be interpreted as evidence of jealousy. Against his own wishes, Hoggle gives Sarah a peach as a gift from Jareth, who threatens to dump him in the Bog of Eternal Stench if he does not do so. But when Sarah loses her way as a result of being induced into a deep sleep brought on the peach, which subsequently causes Sarah to temporarily lose her memory, he is unable to cope with his feeling of