Seven years after the events of Prince of Persia: The Sands of Time, the Prince finds himself constantly hunted by a terrible beast known as the Dahaka. The Prince seeks counsel from an old wise man who explains that whoever releases The Sands of Time must die. Because the Prince escaped his fate, it is the Dahaka's mission as guardian of the Timeline to ensure that he dies as he was meant to. The old man also tells of the Island of Time, where the Empress of Time first created the Sands. The Prince sets sail for the Island in an attempt to prevent the Sands from ever being created, an act he believes will appease the Dahaka. After a battle at sea with an enemy force led by a mysterious woman in black capsizes the Prince's ship, the Prince washes ashore unconsciously onto the Island of Time.

He later awakens and chases the woman in black through the Empress of Time's fortress into a portal that transports the two into the past. The Prince saves a woman named Kaileena from being killed by the woman in black, whose name is Shahdee. Unable to grant the Prince an audience with the Empress of Time, who is busy preparing to create the Sands, Kaileena instead tells him how to unlock the door to the throne room in which the Empress resides. The Prince makes his way through the fortress, using the sand portals to travel back and forth between the past and present, and narrowly escapes several encounters with the Dahaka, who he discovers cannot pass through water. The Prince activates the mechanisms in the two towers of the fortress - the Garden Tower and the Mechanical Tower - that serve as locks to the door. He returns to the throne room only to discover that Kaileena is actually the Empress of Time herself, who has foreseen in the Timeline that the Prince will kill her and who has decided to attempt to defy her fate, just as the Prince is doing. A battle ensues and the Prince proves victorious; he kills Kaileena and returns to the present.

He believes that he has changed his fate, but another encounter with the Dahaka forces him to realize that in killing Kaileena, he was, in essence, the one who created the Sands of Time, as the Sands were created from her remains and they flow into the hourglass. The Prince falls into despair, but then finds a glimmer of hope upon learning of a magical artifact called the Mask of the Wraith, which is said to transport the wearer into the past, allowing the wearer to alter his own Timeline. The Prince wastes no time in seeking out and donning the mask, which transforms him into the Sand Wraith, a monster that constantly ebbs away life, and sends him back to the time when he first arrived on the Island of Time. He formulates a plan to force Kaileena through a sand portal with him, transporting them both into the present, believing that if he kills her then, the Sands of Time will be created seven years after the events of Prince of Persia: The Sands of Time, meaning it will be impossible for the Prince to release them in Azad. While still in the past, the Prince (as the Sand Wraith) ensures that the Dahaka takes and destroys his other self, who has just finished unlocking the door to the throne room, leaving the Sand Wraith the only Prince in that Timeline. This act loosens the Mask of the Wraith from the Prince's face and allows him to remove it and return to his normal form. The Prince goes to the throne room and, despite his pleas to Kaileena, his battle with her begins as before. He forces her into the present with him, and it is at this point that the game has two alternate endings. Which ending is played depends on whether all life upgrades and Water Sword were collected or not.