The game is set during the Third Crusade in 1190, roughly a year before the events of Assassin's Creed. After an unknown mission, the assassin Altaïr Ibn-LaʼAhad arrives in Aleppo, which is under siege by the Templars, who are searching the city for someone on the orders of their grandmaster, Lord Basilisk. After learning about this from a dying Assassin, Altaïr is given a sword which he uses to fight off the attackers. Afterwards, Altaïr is tasked by Al-Mualim, the Mentor of the Assassin Brotherhood, with finding the "Chalice", which is said to have to power to unite all factions and end the Crusades in victory for the side that possesses it. However, the Chalice is too powerful and must be destroyed before it falls into the wrong hands.
Altaïr begins his journey in Damascus, where he learns from a rafik that the Chalice is kept in the Temple of the Sand and that he needs three keys to get inside. Altaïr obtains the first key in Damascus from a circus dancer/mystic named Fajera, before heading to Tyre. There, he learns that the second key has been found by Roland Napule, the head of the local hospital who is said to be twisted. Altaïr assassinates Napule and obtains the key. He then travels to Jerusalem and discovers that Lord Basilisk has the third key. Learning that Basilisk will be attending a party hosted by the king at his villa, Altaïr infiltrates it and confronts Basilisk. He defeats him and retrieves his key, but the Templar grandmaster manages to escape. Later, the Templars attack an Assassin agent, Hazad, and steal his map leading to the Temple of the Sand. Altaïr follows them to their tower, where he kills their leader, known only as "the Master", and takes the map.
Altaïr proceeds to the Temple, only to find an empty chest in the Chalice's place. He is then confronted by Lord Basilisk, who reveals that the Chalice is actually a woman before running away. Altaïr follows him to Tyre and, after gaining access to the Templars' hold, defeats him again. In exchange for sparing his life, Basilisk tells Altaïr that the Chalice has been taken to Jerusalem, and that the Templars are sieging Acre. After fending off the Templar attack in Acre, Altaïr heads to Jerusalem and rescues the Chalice, whom he identifies as Adha, a girl he met and had feelings for in the past. Adha reveals that the Templars have paid off Harash, the second-in-command of the Assassins, to help them attack the Assassin fortress in Aleppo. Altaïr thwarts the attack and assassinates Harash, but while he is away, the Templars re-capture Adha. In Tyre, Altaïr battles Basilisk one final time and kills him aboard his ship, but the Templars escape with Adha on a separate ship. Altaïr looks into the horizon and vows to find Adha.