At a train station, Indiana is stopped by greaser Mutt Williams, who tells him that his old colleague Harold Oxley was kidnapped after discovering a crystal skull in Peru. Indiana proceeds to tell Mutt the legend of a skull found in the mystical city of Akator, in which whoever returns the skull to the city would be given control over its supernatural powers. Mutt gives Indiana a letter from his mother, who was also kidnapped, containing a riddle written by Oxley in an ancient Latin American language, which leads them to the Nazca Lines in Peru. There they discover that Oxley was incarcerated in a psychiatric hospital, having suffered a mental breakdown from the powers of the skull, until he was kidnapped by the Soviets. In Oxley's cell, they find clues that lead them to the grave of Francisco de Orellana, a Conquistador who went missing in the 16th century while searching for Akator. They discover the skull at the grave, with Indiana reasoning that Oxley had hidden it there after finding it.
Shortly afterward, Indiana and Mutt are captured by the Soviets and taken to their camp in Brazil, where they find Oxley and Mutt's mother, who turns out to be Indiana's old love, Marion Ravenwood, and reveals that Mutt is Indiana's son. Spalko believes that the crystal skull belongs to an extraterrestrial life form and holds great psychic power, and reveals that the specimen stolen from the warehouse also has a crystal skull. She also believes that returning the skull to Akator will grant the Soviets the advantage of psychic warfare. Indiana, Marion, Mutt and Oxley manage escape from the Soviets into the Amazon, where Mac claims that he is actually a CIA double agent working against the Soviets and joins the group.
The five reach the temple of Akator where they survive an attack by the Ugha warriors defending the temple. As they enter the temple, Mac, who is actually still loyal to the Soviets, secretly leaves a trail of homing devices for the Soviets to follow. The five enter a chamber containing thirteen alien crystal skeletons, one missing a skull, seated on thrones in a circle. After the Soviets arrive and again reveal Mac's complicity, Spalko places the skull onto the headless skeleton. The aliens begin communicating to the group through Oxley in an ancient Mayan dialect, promising to reward them a "big gift." Spalko approaches and demands to "know everything." The aliens grant her request and transfer their collective knowledge into her mind, activating a portal to another dimension. Indiana, Marion, Mutt and the now-sane Oxley escape the temple, while Mac and the other Soviets are sucked into the portal; the skeletons, meanwhile, form a single alien which overwhelms Spalko with its knowledge, causing her brain to ignite and her body to disintegrate, her scattered essence absorbed into the portal. The temple crumbles, and a flying saucer rises from the debris and disappears to the "space between spaces." After they return home, Indiana is reinstated and made an associate dean at Marshall College, and he and Marion are married.