NOTE: This spoiler was sent in by Heatherwho says... "The movie is really a play that has been filmed on a vast soundstage."
It starts out with a small introduction of the play's characters; the town is not very large, only a few houses that populate "Elm Street" which has never really seen a real elm tree. Nothing much happens there. One night, the town's young philosopher, Tom Edison (Paul Bettany), is walking through the darkened town. He visits his friend Bill (Jeremy Davies), a young man who needs help learning checkers, and takes some ribbing from his blunt sister Liz (Chloe Sevigny), who thinks he likes her. He also witnesses another man scolding his son for giving their dog a meaty bone when they don't have much to eat themselves.
Tom suddenly hears gunshots. He peers into the darkness to investigate, but sees nothing in the distance. He sits on a park bench to think. Suddenly, the town's dog starts barking, and Tom can tell that something or someone is really close by. The dog is snarling. He goes to investigate, and we see a young women (Nicole Kidman) dressed in a long elegant black coat, with a fur collar, stealing the dog's bone. She tries to run up the mountainside to hide, but Tom warns her there is a sharp drop off ahead. She is coaxed back down the mountain, but then headlights from a car approach and she is frightened. He helps her to hide in a mine when an elegant black car drives up. The men in the car are gangsters. They are looking for a young woman of the description like the woman Tom just helped to hide. Tom pretends to know nothing. A voice from the backseat of the car, hidden by a curtain, asks Tom to call if she turns up, and extends a business card through the window. The car drives away.
Tom feels that the young woman is a "gift" to the town, and he invites her into his home for a warm drink and something to eat. He gently persuades her to give up the bone she stole and offers her bread, which she reluctantly accepts. Tom has a plan to have Grace, which is her name, accepted into the town. He calls a meeting of the townspeople the next evening, and introduces her to them. They are wary and suspicious, but finally agree to have her for 2 weeks, at which time they will vote on whether to allow her to continue to live there.
In the 2 weeks, Grace tries hard to make herself useful, giving each family an hour of her time, in which they find small jobs they never thought were really necessary before. She helps a woman with her disabled daughter, visits a lonely blind man who denies he can't see, helps weed a woman's gooseberry garden, and takes care of the many children of one couple named Chuck & Vera. She helps the organist turn the pages of her sheet music as she practices, and offers beauty tips to Liz. The townspeople reluctantly start to accept her. Grace admires some figurines in the window of a shop in town. She decides to buy each one with the wages she earns.
The townspeople don't know why Grace is running from the gangsters who are after her, but they feel protective of her. Even when a policeman arrives with a "Missing" poster with Grace's full name and picture on it, and posts it on a town wall, they do not reveal her secret. They agree that the town bell will be rung as a warning if they see cars coming up the long road that stretches away into the distance.
It is nearing the end of the two weeks of Grace's trial stay, and most of the town has begun to accept her, except for Chuck (Stellan Skarsgard), Vera's husband, who becomes angry when he finds Grace babysitting his children while Vera is out one day, and McKay (Ben Gazzara), the local blind man, who finally admits he cannot see, one day when Grace is visiting and she insists on pulling his always-shut curtains open. Grace is sure that when the town votes, these two will not vote to allow her to stay.
The moment arrives, and Grace tells the townspeople she will wait in the mine while they decide her fate. If they want her to stay, they will ring the bell once for each vote in her favor. If it rings 15 times, she will know they want her to stay. She goes to get her belongings in case she must leave, and finds all sorts of gifts have been wrapped into her bundle: a map, a loaf of bread, a dollar bill. She is touched. Finally back at the mine, she hears 14 rings. She realizes she must leave but just as she sets her foot on the road, the bill rings once more. She can stay after all.
Spring comes, summer comes, and Grace seems to have settled into the town's routine. She is even falling more in love with Tom.
They are seen holding hands at a picnic. She gets her own home which the people help her furnish. Then the police arrive again; they have a "Wanted" poster this time, and claim that Grace is wanted for some bank robberies that occurred two weeks ago. The townspeople say nothing about Grace; they realize she must be innocent, since she's been in town since before the robberies. Nevertheless, at a town meeting, they decide to cut her wages and increase her work load, in exchange for their protection. Grace is running around all over the place but she is slowly buying the figurines she admired, and spending time with Tom in the evenings. She has 5 of the 7 figurines now.
The townspeople start to take advantage of Grace's situation, as they realize how much power they have over her. Chuck, Vera's bitter husband, tries to kiss Grace when she is working with him in the orchard. She rebuffs him but feels badly for him at the same time. The blind man, McKay, who Grace still visits every day, starts to put his hand on her knee during her visits. The woman with the gooseberry bush scolds Grace for walking across a gravel path after she has raked it perfectly smooth. Vera's son, whom Grace is teaching at the school, goads Grace into giving him a spanking (he seems to like spankings), but then threatens to tell his mother that Grace hit him.
Finally one day, the police arrive again. Chuck realizes Grace cannot run away when the police are there, corners her in a house, and rapes her. The police leave, but Grace is cornered; she cannot leave lest she be arrested, but the townspeople are raining down more abuse every day. Vera comes by with Liz, and tells Grace to stay away from her children, since her son told her that Grace hit him. Grace admits that she did, and Liz backs up her claim that Vera's son is always asking for a spanking. But Vera isn't moved.
Soon after, someone witnesses Grace and Chuck having sex in the apple orchard, not realizing Chuck is forcing himself on Grace whenever he can. Vera gets the news that Grace is sleeping with her husband, and comes to Grace's home for revenge. As Grace is restrained, Vera breaks the figurines Grace has collected. She taunts Grace that if she can resist crying while she does it, she will spare the figurines from being broken. Grace cannot hold back her tears, however.
Tom finally decides to try to figure out how to help her escape. He advises her to pay the man who hauls apples in his truck $10 to hide her and take her out of town. Grace does so, using money from Tom that Tom has taken from his father's medicine cabinet. She falls asleep in the truck during the trip. But then when they arrive at the next town, the man driving the truck claims police are all around, and that he needs a surcharge for the extra risk. He forces himself on Grace in lieu of payment. Then he drives Grace back to Dogville, where she is accused of stealing money from Tom's father. An iron collar is attached to Grace's neck, which is chained to a heavy iron wheel which she must drag everywhere. She cannot leave. Tom shamefacedly reveals to Grace that he did not have the nerve to admit to the townspeople that he actually was the one who stole the money.
Grace is given two days vacation, then starts to work again. She is now raped on a regular basis by all the men in town. McKay, the blind man, molests her regularly. Tom, though he claims to love Grace, does nothing to stop the abuse. In fact, he does not understand why he is the only man in town not sleeping with Grace. At a town meeting where he arranges for Grace to rebuke the people for their abuse of her (which falls on deaf ears), they ask him to choose between them and her. He chooses Grace. However, Grace still does not wish to consummate their relationship, and Tom is angry.
Finally, after some uncomfortable self-reflection, Tom decides to use the card given to him by the gangster, to get rid of Grace once and for all. He calls the gangster to come get her, sure that they will want to kill her. Grace is locked into her home so that she will not be able to escape.
The gangsters arrive and spread out among the streets with machine guns. They are shown to Grace's shack by Tom himself but contrary to their expectations, the gangsters are angered to see how Grace has been treated. They demand that the collar be removed from Grace's neck and she is shown to the elegant black Cadillac that has arrived. She gets in and meets her father.
Her father tries to persuade Grace to come back with him. He says he has heard she is not doing so well here. At first, Grace is not willing to listen to what her father says. She realizes nobody will shoot her, since she wasn't shot as soon as she was found, but she still seems convinced that Dogville is a better place than where she grew up. Her father says he won't shoot her, he should never have shot at her the first time, that was a mistake. (This explains the shots at the beginning of the drama.)
Grace's father criticizes her for being so forgiving of all the abuse that has been heaped upon her. He calls her arrogant for not keeping the townspeople at the same moral standards at which she keeps herself. They take turns calling each other arrogant, but as the conversation ends, Grace seems to be swayed by her father's persuasion. There really isn't much difference between Dogville's residents and the gangsters she grew up around.
Just as she is about to make a decision, one of the gangsters leans in the window, telling them that Tom wants to talk to her. He asks if he should just shoot him now. Grace gets out of the car, where Tom tells her he is frightened, that he is sorry for all that she has gone through, he is sorry he was weak.
But it is too late. Grace gets back in the car and gives the order that the townspeople be killed and the town burned to the ground. She realizes that if ever a town deserved to be destroyed, it is this one. She has some special instructions, too: she tells them to kill Vera's children in front of her, and to tell Vera, if she can watch them die without crying, they will be spared.
Grace cries as she watches the carnage but does nothing to stop it. Finally, at the end, she is given a gun and she murders Tom. Then she rides away with her father. All that is left is the barking dog, the only resident to be spared.