The film begins with two rowdy high school seniors racing along an abandoned stretch of Texas highway, en route to a weekend of fun in Dallas. They are heavily intoxicated and use their car phone to call and harass on-air radio DJ Vanita "Stretch" Brock (Caroline Williams). Unable to convince them to hang up, Stretch is forced to keep the line open as what began as a simple game of chicken for the boys quickly turns into a nightmare. The two teenagers encounter a large pickup truck which runs parallel to them on a remote bridge. Suddenly, Leatherface (Bill Johnson), wielding a chainsaw, emerges from the back of the truck and proceeds to attack the boys. After a short struggle, Rick (the passenger) tries to shoot Leatherface with a .44 Magnum revolver, but misses his target. Leatherface then slices off part of the head of the driver, and the car ends up crashing.
The following morning, Lieutenant "Lefty" Enright (Dennis Hopper), former Texas Ranger, and uncle of Sally Hardesty and her invalid brother Franklin, who were victims of Leatherface and his family years earlier, arrives at the scene of the crime to help solve the murders of the two teenage boys. Lefty has spent the last thirteen years investigating his niece and nephew's disappearances while investigating reports of mysterious chainsaw killings across Texas. Although regarded with disdain by his peers, Lefty is able to convince the local newspaper to print a tiny article about his quest for justice. The article captures the interest of Stretch, who brings him a copy of the audio tape which recorded the death of the two teenagers. Initially mortified, Lefty asks Stretch to play the tape on her nightly radio show.
As the sounds of the horrible attack echo across the airwaves of Texas, Leatherface's family arrive at the radio station. While preparing to leave for the night, Stretch finds Chop Top (Bill Moseley) (who was stationed in Vietnam during the first film and is a twin to the "Hitchhiker" from the first film), waiting in the lobby. When she tries to get rid of him, Leatherface emerges from the darkness. Horrified, Stretch locks herself behind the metal door of a storage closet, holding off Leatherface until he comes through the wall. Meanwhile, Stretch's co-worker arrives, but is beaten badly with a tack hammer by Chop Top. As Leatherface approaches Stretch, about to attack, she does some fast talking and charms him into sparing her. After a moment of distraction, Leatherface restarts his chainsaw and tears off through the studio slashing at walls, furniture and studio equipment, but leaves Stretch alive. He returns to the reception area where he leads Chop Top to believe that he has killed Stretch. Leatherface and Chop Top haul Stretch's mortally wounded co-worker off to their home, followed by Stretch, who winds up trapped inside the Sawyer home, which is actually an abandoned carnival ground decorated with human bones, multi-colored lights, and carnival remnants.
Lefty soon turns up with three chainsaws of his own and begins to carve up the home in a rage shortly before he finds the remains of his nephew, Franklin. Drayton (Jim Siedow) finds Stretch roaming the grounds and the family capture her. Lefty eventually finds her being tortured at the dinner table and saves her. A battle between Lefty and the Sawyer family ensues, ending with a chainsaw duel between Leatherface and Lefty, with Lefty gaining the upper hand when he stabs Leatherface in the stomach. In the end, Lefty and most of the Sawyer family (Leatherface, "Grandpa" and Drayton) are apparently killed when one of Drayton's grenades goes off prematurely. Only Chop Top and Stretch escape, where they have a final battle in a carved-out rock tower that overlooks the property. Despite being slashed several times with a straight razor, Stretch grabs a chainsaw held by the mummified remains of the family's grandmother in a ritual shrine in the rock tower. Stretch then gets the upper hand on Chop Top, as she cuts him with the chainsaw, causing him to fall off the tower to a presumed death. The final shot shows Stretch standing on top of the tower and emulating Leatherface's famous chainsaw dance from the ending of the first film.