In Budapest a young operatic soprano Elena Korvin is struggling to rehearse the part of Marguerite in the Opera Gounod's Faust despite the assistance from her loving husband Sándor Korvin, the orchestra's conductor. Later the Opera House's owner Baron Hunyadi attempts to win Elena's heart to draw her away from her husband but Elena refuses. She leaves with a fearful threat from Hunyadi that her career in his opera house will end. Elena loses hope of succeeding as Marguerite believing she is not good enough. But her husband Korvin insists that she is good and proves so by convincing her to be calm and confident. In revenge for Elena refusing to love him the baron bribes a man [Who had already made a deal with Korvin to help encourage Elena during the show] to make the audience boo and despise Elena during her debut performance. He also bribes the critic to write a bad review about her in the paper. Completely heartbroken Elena jumps into the river, drowning herself. A vengeful Korvin murders the man who drove the audience against his wife, then he goes to confront the critic. During a struggle with the critic the office catches fire. Korvin murders the critic but a bottle of sulphuric acid falls over on a shelf and splashes on to Korvin's face badly burning him. He is saved from the fire by the rat catcher Lajos who hides him in the cellars beneath the Opera house. Lajos steals a mask from the costume department to hide Korvin's deformity caused by the acid. From then on Sándor Korvin becomes the "Opera Ghost" AKA The Phantom of the Opera.
Four years later, Faust is being performed again. The selfish leading soprano Madame Brigida Bianchi refuses to follow the direction from the show's English director Michael Hartnell. The spoiled diva accuses everyone in the show being the reason for her problems and walks away. Hartnall offers Baron Hunyadi to take over the show. But Hunyadi refuses due to his "personal relationship" with Madame Bianchi. So Hartnall holds an understudy audition for the part of Marguerite. A young Italian/American soprano Maria Gianelli, who has a crush on Hartnall performs a perfect audition which amazes everyone and she is granted the part. The Phantom who also witnessed the audition is interested in Maria, not just because of her voice, but because she bears a remarkable resemblance to Elena. He vows to help her and that her triumph as Marguerite will be his revenge.
Hartnall and Maria begin to develop feelings for each other during the first few days of rehearsals. The Phantom slips an insulting note to Madame Bianchi. The diva accuses Maria thinking it was she who sent the note. Despite Maria denying this Madame Bianchi declares that she never wants to see Maria in the theatre again. At home Maria sits sadly. When her lights unexpectedly turn off she is approached by The Phantom. At first she is afraid of his masked face but he assures her the mask is to protect her. He says he wants to help Maria and make her a great singer. He offers her the key to the place to meet him and where she can learn. Maria takes the key accepting his offer.
The next day Maria finds the key is to the door of a huge and beautiful house. In one room she finds a wardrobe of ladies clothes and a framed photo of Elena on a vanity. Maria is confused by the resemblance between her and the blonde woman in the photo. When The Phantom arrives he tells Maria that he'd like her to wear the clothes in the wardrobe while they are rehearsing, that she will tell no one of him or of the house and devote her days to the lessons. As the days go by Maria's voice improves strongly with her lessons. Due to constant pranks from The Phantom, Madame Bianchi leaves which makes Maria the new leading lady. Hartnall and Maria fall in love each other. But Hartnall is choked at the Turkish spa by The Phantom, threatening Hartnall to stay away from Maria. Hartnall decides to postpone Maria's debut, believing she is not ready. Maria sends a note to The Phantom to meet her at the Masked Ball.
At the masked ball, Hunyadi attempts to win Maria’s affections but just like Elena, Maria turns down The Baron’s advances. She is then met by The Phantom who wears a mask that resembles his original face and the two of them dance. The Phantom tells her not to see Hartnall again and they will be together forever. She flees from the ball but is kidnapped along with Hunyadi by Lajos and taken to The Phantom’s lair. Maria is knocked out when she attempts to escape again. Hunyadi realizes The Phantom’s true identity is Sándor Korvin, he promises that if he is freed he will make Maria the star Elena should have been. Korvin frees the baron but when Hunyadi enters his car he is pecked to death by a crow. His body is then discovered hanging from a backdrop above the stage.
When Maria awakes the Phantom says that she will remain underground with him so she won’t suffer as his wife did. Maria says that if he lets her go she would to return. But The Phantom assures her that in his heart he is good and he wants her to love him. While caressing him she rips away his mask revealing his burned deformed face. Angered Korvin declares that Maria will never leave the underground. After revealing a dead girl’s body dressed in Maria’s ball dress, he says that when her body is discovered the police will believe the corpse is Maria’s. He leaves to dump the body and has Lajos watch over Maria. Hartnall who has been tracking Korvin discovers the lair by hearing Maria’s singing. Lajos gets knocked out and Hartnall helps Maria escape. Korvin murders Lajos for failing to guard Maria and disappears from the underground. The police inspector and Hartnall plan to capture Korvin in the theatre during a performance with Maria as bait sitting in the audience.
On the night, Korvin plans to drop the chandelier on the inspector who is sat directly beneath it. Maria swaps seats with the inspector because she felt unsafe in the opera box she was originally sitting in. Korvin who is on the chandelier sawing through its chain spots Maria sitting down beneath the chandelier. Fearfully he tries to get back up to prevent the chandelier falling on her, but the chain breaks and both Korvin and the chandelier go down. Maria sees it falling and gets away just in time with the other audience members. But Korvin dies from the fall and lies with his mask fallen from his deformed face.
- Maximilian Schell as Sándor Korvin/The Phantom of the Opera - Formally was the orchestra conductor before he became the Phantom.
- Jane Seymour as Elena Korvin - Sándor Korvin's wife who commits suicide.
- Jane Seymour also plays Maria Gianelli - An Italian/American who dreams of becoming a great singer. She also resembles The Phantom's late-wife.
- Michael York as Michael Hartnell - English opera director and Maria's love interest.
- Jeremy Kemp as Baron Hunyadi - Owner of The Opera House, who takes pleasure in having affairs with the leading ladies.
- Diana Quick as Madame Brigida Bianchi - Spoilt diva who cares only for herself.
- Paul Brooke as Inspector - Police inspector who investigates Korvin.
- Gellért Raksányi as Lajos - The Rat catcher who works alongside The Phantom.