Immediately following the events of their last film, the Muppets find themselves at a loss as to what to do for their sequel. They are approached by Dominic Badguy, who offers to manage the group and schedule a European tour. Meanwhile, the criminal mastermind Constantine, a near-exact double for Kermit the Frog in appearance, escapes from a Siberian Gulag and joins his subordinate Badguy to begin a plot to steal the Crown Jewels of England.
Once the Muppets arrive in Berlin, Badguy secures them a show at a prestigious venue. Kermit, frustrated with the troupe's ludicrous requests and Miss Piggy's insistent hints at marriage, goes for a walk at Badguy's suggestion. Constantine ambushes him and glues a fake mole onto his cheek, matching Constantine's own, then slips away; the locals mistakenly identify Kermit as the criminal, and he is arrested and sent to the Gulag. Constantine takes Kermit's place, raising the suspicions of no one except Animal, and he and Badguy steal several paintings from a museum during the show. The next morning, Interpol agent Jean Pierre Napoleon and CIA agent Sam Eagle grudgingly team up to apprehend the culprit, whom Napoleon believes to be his nemesis, "The Lemur" - the number-two criminal in the world.
Following instructions hidden behind one of the stolen paintings, Constantine and Badguy divert the tour to Madrid. Constantine informs the Muppets they can perform any act they wish, much to Walter's puzzlement. During this show, Constantine and Badguy break into a museum and destroy a roomful of busts to find a key needed for their plan. Even though the performance is a disaster, the Muppets receive critical acclaim. Sam and Napoleon deduce that the connection between the crimes is the Muppet tour, and the pair interrogate the Muppets with little success. The instructions on the stolen key lead Constantine and Badguy to schedule the next show in Dublin, Ireland.
In Dublin, Walter discovers that Badguy has been giving away show tickets and bribing critics to ensure a packed house and rave reviews, and Fozzie Bear notices the resemblance between Kermit and Constantine. The two realize that Constantine has taken Kermit's place and brought in Badguy as his accomplice. Constantine attacks Walter and Fozzie, but Animal fends him off and the three escape from the train so they can rescue Kermit. During the Dublin performance, Badguy steals a locket from a museum and Constantine proposes to Miss Piggy onstage; she accepts, and the pair plan a ceremony to be held at the Tower of London, where the Crown Jewels are kept.
Meanwhile, Kermit has been making numerous attempts to escape from the Gulag, each one thwarted by prison guard Nadya. Aware of his true identity and obsessed with him, Nadya orders Kermit to help organize the prisoners' annual talent show. Fozzie, Walter, and Animal reach the Gulag on the night of the performance, and Kermit uses it as a front to allow them, himself, and all the prisoners to escape.
The four Muppets infiltrate the Tower as the wedding begins, and Badguy (with the help of Bobby Benson's Baby Band) uses the stolen key and locket to disable the security system protecting the jewels and steals them. Kermit interrupts the ceremony, revealing Constantine's true identity, but the criminal takes Piggy hostage and flees to a waiting helicopter. He is intercepted by Badguy - actually the Lemur and now dressed in a lemur costume - who intends to double-cross Constantine and keep the jewels for himself. Constantine ejects him from the helicopter and tries to take off with Piggy, but Kermit jumps aboard and the rest of the Muppets climb atop each other to stop the escape. Kermit and Piggy knock Constantine out and both criminals are arrested.
Nadya arrives in London to arrest Kermit. The other Muppets tell her that if she arrests him, she will have to take all of them as well. She lets the Muppets complete their tour, and they perform at the Gulag with Constantine and the prisoners participating.
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