The novel begins in an alternate world that is similar to Earth. Lyra Belacqua, a young girl who has been given shelter by the scholars at Jordan College at Oxford University, and her “daemon,” Pantalaimon, hide in an off-limits wardrobe in the Headmaster’s rooms. (In Lyra’s world, daemons are the external forms of people’s souls.) Lyra and Pantalaimon learn that Lord Asriel, Lyra’s uncle, is about to be poisoned by the Headmaster for mysterious reasons. They warn Lord Asriel in time to save his life. Later, they overhear Lord Asriel telling the scholars at Jordan about a strange substance he is researching called “Dust.” Lord Asriel is able to convince the scholars to fund his further explorations of Dust, which require him to travel to the northernmost reaches of the globe. All of this greatly excites Lyra’s curiosity about Dust.
Later, mysterious kidnappers whom Lyra and her friends call “Gobblers” take Lyra’s best friend, an Oxford boy named Roger Parslow. Lyra wants to go look for Roger, but before she can, a woman named Mrs. Coulter, who appears initially to be some kind of benefactress, spirits her away to London. Before Lyra leaves Oxford, the Headmaster gives her a golden compass called an alethiometer, which Lyra does not know how to use. Arriving in London, Lyra is at first enchanted by Mrs. Coulter, but Lyra’s rebellious nature, as well as her suspicions about Mrs. Coulter’s vicious daemon, lead her to flee Mrs. Coulter’s house. Lyra wants to go north and learn more about Dust. Before she can, however, she falls in with the Costas, a family that is part of a clan of people known as Gyptians, who live in boats and travel on the rivers. The Costas have also lost a boy to the Gobblers.
The Costas take Lyra to meet John Faa, the king of the Gyptians, who is planning an expedition north in search of the Gobblers and the missing children. From her meeting with John Faa, Lyra learns that Ma Costa (the mother of the Costa family) looked after her when she was a baby and that Lord Asriel is her father and Mrs. Coulter is her mother. Lyra convinces the Gyptians to take her north with them on their quest to recover the captured children. On the way there, Lyra learns how to use the alethiometer—a device that allows her to see into the past, present, and future—with the help of Farder Coram, a wise old Gyptian man. Their journey north also throws Lyra into contact with a man named Dr. Lanselius, the representative of a powerful clan of witches. Lanselius tells Lyra that she has a great destiny before her. Lanselius also introduces her to Iorek Byrnison, an armored bear who is the exiled king of his clan. Iorek agrees to travel with Lyra and the band of Gyptians, who also take up with Lee Scoresby, a Texan who owns a balloon. They continue to move north.
On their way to Bolvanger, where the Gobblers work, a menacing clan known as the Tartars attack Lyra and the Gyptians. The Tartars steal Lyra and bring her to Bolvanger, where the Gobblers keep the children they have kidnapped. Here, Lyra finds Roger and also discovers the sinister secret of the Gobblers: they cut daemons and children apart in a process known as intercision. Furthermore, Lyra learns that Mrs. Coulter is in charge of the activities at Bolvanger.
Lyra leads the children to freedom, but Mrs. Coulter pursues her. Lee Scoresby rescues Lyra, Roger, and Iorek Byrnison with the help of Serafina Pekkala, a beautiful witch. They fly away from Mrs. Coulter and are on their way to rescue Lord Asriel, who is being held prisoner by the armored bears, when they are attacked by cliff ghasts. Lyra falls from Lee Scoresby’s balloon and is captured by the armored bears. She meets Iofur Raknison, who stole Iorek Byrnison’s throne, and convinces him to fight Iorek by tricking him into believing that she, Lyra, will become his daemon if he wins. Iorek goes to the home of the armored bears with Roger and kills Iofur. Lyra, Roger, and Iorek go to free Lord Asriel. Lord Asriel tries to sever Roger’s daemon from him in the correct belief that doing so will release a mass of energy and break through his world into another. Roger dies, and Lord Asriel creates a bridge from his world into another. Lyra follows him into the new world.
The Subtle Knife begins not in Lyra’s world, but in our own. Will Parry, a young boy who lives in Oxford with his sick mother, is being pursued by sinister men who claim to be with the government. Fearing for her safety, Will takes his mother to the home of his old piano teacher, Mrs. Cooper. He returns home but finds that the ominous men have arrived and are looking for letters exchanged between his parents. Will finds the letters first and escapes, killing one of the men along the way. As he is fleeing, Will stumbles into an “anomaly,” a hole in space that leads him into another world. He finds himself in an abandoned city where he runs into Lyra, who is also hiding there. Lyra is surprised to find that Will has no daemon, while Will is surprised to hear her describe daemons, which he’s never heard of.
Meanwhile, Serafina Pekkala, a witch and a friend of Lyra’s, is looking for her witch clan when she comes across Mrs. Coulter’s boat is floating in the North Sea. Serafina lands on the boat, makes herself invisible, and discovers that Mrs. Coulter has captured a witch and is torturing her in an effort to find out what the witches know about Lyra. Before the witch can speak, Serafina makes herself visible, kills the witch, and escapes. She then rejoins her clan, which has met up with Lee Scoresby. The queen of the witch clan, Ruta Skadi, is also there. Lee is searching for Stanislaus Grumman, a famous arctic explorer. Serafina and her clan send out witches to search for Lyra. Ruta decides to travel with them and then look for Lord Asriel.
Will and Lyra meet a young girl named Angelica and her brother Paolo, who explain that the city they’re in is named Cittàgazze, or Ci’gazze. The city is overrun with beings called “specters.” Children can’t see specters, but adults can. Specters feed on adults’ souls, leaving them in a kind of stupefied trance. Lyra and Will go through the anomaly to Will’s Oxford. Will is looking for information about his father, a famed Arctic explorer named John Parry who vanished when Will was a baby, and Lyra is looking for a physicist who can tell her more about Dust. Lyra consults the alethiometer, which leads her to Dr. Mary Malone, a scientist interested in interstellar particles known as dark matter. Mary and her colleague, Oliver Payne, have discovered substances they call “Shadows,” which share many characteristics with the Dust that Lyra is interested in learning more about. Mary and Oliver have discovered that Shadows are conscious material and they are trying to open a means of communication between themselves and the Shadows. Lyra and Will meet up again and go back to Ci’gazze. Will reads the letters his father sent to his mother and learns that his father disappeared while looking for an anomaly, a window between two worlds, very much like the one Will used to get to Ci’gazze.
Meanwhile, Lee Scoresby accidentally kills an agent of the Church, the sinister and very powerful religious organization that lies at the heart of the books. Serafina, Ruta, and the other witches fly into the new world that Lord Asriel has linked to (the world of Ci’gazze). Rebel angels lead Ruta to Lord Asriel and the fortress he is building in yet another world. Back in Ci’gazze, Lyra goes to Will’s Oxford without him. She visits Mary and finds that the police, or people pretending to be police, are there. They trick her into admitting that she knows Will. A mysterious man named Lord Charles Latrom helps Lyra escape by letting her into his limousine. He drives her back to the hole between worlds and steals Lyra’s alethiometer. Lyra gets Will, and together they go to Latrom’s house. Will figures out that Latrom is from Lyra’s world because he sees that Latrom has a daemon. Latrom tells Lyra and Will that he will only give back the alethiometer if they steal something for him: an immensely powerful weapon known as the subtle knife.
Lyra and Will return to Ci’gazze and go to the Torre degli Angeli (Tower of the Angels), where the knife-bearer is supposed to be. There they find that Angelica and Paolo’s other brother, Tullio, has captured and beaten the knife-bearer, an old man named Giacomo Paradisi, and is trying to figure out how to use the weapon. Will and Tullio fight, and though Will loses two fingers in the battle he emerges victorious and keeps the knife. Tullio, however, escapes.
Giacomo tells Will that the knife is what makes the holes between the worlds. He teaches Will how to open and close these passageways. Lyra and Will wait until later that night and return to Will’s Oxford, where they use the knife to steal the alethiometer back from Latrom. While they are at his house, Mrs. Coulter arrives, and Lyra remembers that Sir Charles Latrom is Lord Borealis, a man Mrs. Coulter knows from her own world. Lyra promises to help Will find his father.
Lee Scoresby, meanwhile, has found Stanislaus Grumman, who tells him that his name is actually John Parry and that he comes from another world. Parry is now a powerful shaman who has been investigating Dust. In the course of his studies, Parry has also learned about the existence of the subtle knife. He is now determined to find the knife and exhort its bearer to use it for the good of the universe. Parry does not yet know that Will is in possession of the knife and he enlists Scoresby’s help to scour existence in search of the knife’s bearer.
Back in Ci’gazze, a mob of angry children, led by Tullio’s sister Angelica, attack Lyra and Will. Serafina and her band of witches rescue them. Back in Will’s Oxford, Mary Malone has begun to communicate with the Shadows and has learned from them that she has to go to Ci’gazze in order to help Lyra and Will. Meanwhile, Ruta Skadi rejoins Serafina’s clan and tells the witches about Lord Asriel’s fortress. She explains that Lord Asriel is planning to wage war on God. She leaves again, and Serafina’s band continues north.
Lee Scoresby and John Parry, traveling in Lee’s balloon, enter into the world of Ci’gazze. Soldiers sent by the Church pursue them. Lee crashes the balloon and John uses his powers to make three of the four Church zeppelins that are pursuing them crash. The fourth lands, and Lee dies in the fight to hold off the soldiers while Parry runs ahead to meet the knife bearer. Lyra, Will, and the witches, led by the alethiometer, continue rushing north.
Elsewhere, Mrs. Coulter catches a witch named Lena Feldt. Lena admits that the witches believe that Lyra is going to be a new Eve and that she will cause another fall from grace. That same night, Will wakes up and leaves the camp he has established with Lyra to go for a walk. He meets John Parry on a lonely mountaintop and the two simultaneously realize their relationship to one another: Parry is Will’s father. Parry tells Will that the subtle knife, the most powerful weapon in the world, can destroy God and that Will must seek out Lord Asriel in order to set up an ultimate confrontation between good and evil. Suddenly, Juta Kamainen—a witch whose love Parry once rejected—appears and kills Will’s father and then herself. Devastated, Will heads back to the camp. As he arrives, he discovers that awaiting him are two angels. The witches are gone and the only sign of Lyra is her alethiometer lying in the dust.
The book opens deep in a cave in the Himalayas, where Mrs. Coulter is holding Lyra captive, feeding her some sort of poison that keeps her asleep. Lyra dreams of speaking to Roger in the world of the dead. She promises she’ll come for him. A little girl named Ama brings food to Mrs. Coulter and tries to find a way to wake up Lyra.
In the meantime, the angels Balthamos and Baruch are trying to bring Will to Lord Asriel so that Will can use the knife to kill God (known as “the Authority”). Will refuses and says his first task is to rescue Lyra. Metatron, the strongest of all Church angels, attacks Baruch and Balthamos. Will rescues them and brings them into another world. Balthamos goes with him and Baruch goes to Lord Asriel in order to tell him of Will’s decision. Serafina Pekkala meets with Iorek Byrnison and tells him that Lee Scoresby is dead. Iorek goes to find the body of his friend in the world of Ci’gazze before returning to his own world to lead the armored bears south to the Himalayas. Baruch is attacked on his way to Lord Asriel’s fortress and dies as he is telling Lord Asriel that Will has the subtle knife and Mrs. Coulter is holding Lyra captive.
While Lord Asriel and his allies plan to rescue Lyra from Mrs. Coulter, the Church plans its own mission. Having learned from its own alethiometer reader that Lyra is going to be a new Eve, Church leaders plan to kill her. They send a priest named Father Gomez out to look for Mary Malone, who they believe will lead them to Lyra and Will. They also send out a force to attack the cave in which Mrs. Coulter is keeping Lyra. Mary, in the meantime, is making her way through the world of Ci’gazze. She enters a hole into another universe where she meets the mulefa, conscious beings that travel on wheels. They take her in and teach her their language.
Will is traveling in Lyra’s world with Balthamos, who pretends to be his daemon. Will and Balthamos come across the armored bears, and Will convinces Iorek Byrnison to bring him south and help him rescue Lyra. As Will and Iorek travel South, two of Lord Asriel’s spies travel toward Lyra’s cave with the Church’s fighting force. These spies are Chevalier Tialys and Lady Salmakia, two very small people who ride dragonflies and who are known as Gallivespians.
When he finally arrives in the Himalayas, Will meets Ama, who helps him save Lyra. At night, they enter the cave by using the knife to cut through to another world. Mrs. Coulter catches them and makes Will break the knife. Chevalier Tialys stings her and paralyses her. Just then, Lord Asriel’s forces and the Church’s forces converge above them and begin to fight. Ama and Will wake Lyra and bring her to safety. Chevalier Tialys and Lady Salmakia come with them and the group finds Iorek, who has been fighting. Iorek is able to mend Will’s knife, and Will and Lyra decide to go to the world of the dead and rescue all the souls trapped there. To enter the world of the dead, Will and Lyra must leave their daemons behind. This is the first time Will has realized that he has a daemon. They enter the world of the dead and lead all the ghosts to freedom.
Mrs. Coulter has been captured by Lord Asriel’s ally, King Ogunwe, who brings her to Lord Asriel’s fortress. Mrs. Coulter steals a ship and flies to the Consistorial Court, a branch of the Church, where she discovers a plot to build a bomb that will kill Lyra. She tries to stop them with the help of the leader of the Gallivespian spies, Lord Roke. Mary, in the world of the mulefa, makes a mirror for herself that enables her to see Dust. In the world of the dead, the bomb explodes but does not kill Lyra. Instead, it creates a great abyss. Will uses the subtle knife to cut a hole through which the dead can escape. Will’s father’s ghost tells him that Will and Lyra’s daemons are hiding in Lord Asriel’s world.
Will and Lyra go to Lord Asriel’s world, where the forces of Metatron are attacking Asriel’s fortress. Lyra and Will rescue God from a group of cliff ghasts, but God dies, drifting away into the atmosphere. Chevalier Tialys and Lady Salmakia die in battle. Lyra and Will find their daemons and escape into the world of the mulefa. Mrs. Coulter lures Metatron to the abyss that was opened by the bomb. She and Lord Asriel drag him into the abyss to die. The mulefa find Lyra and Will, whose daemons have run away again, and bring them to Mary, who tells them what it’s like to fall in love, and how holy it can seem. Mary has discovered that Dust is leaving the world, and she is worried. While they are looking for their daemons, Will and Lyra realize that they are in love. Just before they kiss, Father Gomez tries to kill Lyra, but Balthamos appears and kills Father Gomez.
When Lyra and Will realize they are in love, the Dust stops escaping so quickly. Lyra and Will find their daemons, but Serafina and an angel named Xaphania say that Will and Lyra must be separated. Dust is escaping through the holes made by the subtle knife, and they have to close the holes and return to their own worlds. Lyra tries to consult the alethiometer but has lost the ability to read it. Will and Lyra agree to be separated, but they pick a spot that exists in both their worlds, where they can sit and think of each other. Will and Mary return to their world, and Lyra and Pantalaimon return to Jordan College. There they meet a female scholar who offers to teach Lyra how to read the alethiometer. Lyra and Pantalaimon agree that they have to cherish the lives they have and work to build the Republic of Heaven.