The film starts with a young Ignacio stealing various stuff around the church orphanage to make his own wrestling costume. Unfortunately, he is discovered by the priests running the place and punished appropriately, being given kitchen duty, and we cut to Ignacio as a grown up preparing breakfast for everyone and giving it out. One of the children complains about how it's always the same thing, and Ignacio (Jack Black) says that it's very special today and samples it, but spits it out over himself and the kid. Later, we see him at services with some of the kids, and it is shown that he is not really paying attention and is instead designing a wrestling costume for himself. He looks up and sees a kid that resembles his youthful self, Chancho (Darius Rose), watching him. He quickly puts the stuff away.
The next day, in class, we see the head priest telling the students that a new teacher has arrived, Sister Mary Encarnación (Ana de la Reguera). Ignacio immediately falls for her and makes a fool of himself. Later, during recess, he tries to ask her on a date to his quarters for some toast but is cut off by the young handsome priest, who sends him to town to see to a dying man while the handsome priest tries to flirt with Mary. Meanwhile, Ignacio hops on his motorwagon (it looks like a four-wheeled motorcycle) and heads into town. He arrives at the house of the man, who has apparently died. Ignacio comforts the widow, performs rites, places two coins on the mans eyelids so he can get across the river Styx....and jumps back screaming as the man sits up. Later, we see Ignacio in town just as the great Mexican wrestler Ramses (Cesar Gonzalez) pulls up in his limo, ignores his fans, and goes into a wrestling arena as Ignacio watches jealously. Ignacio sighs and heads back to the orphanage just in time for him to see someone trying to steal some used food. He tries to stop the person, but is wrestled to the ground. The mystery person takes the food and runs off. Ignacio heads inside, and we next see him slipping some toast under the door of Mary's room. She opens it and he comes in, and we find out that he loves the children more than anything, loves everything she loves (possibly a line), and lost both his parents at a very young age. By the time they both go to sleep, we can see that she thinks he's great and he's even more in love with her.
The next day, we see Ignacio serving breakfast when the handsome priest comments about the poor quality of the food. This sets Ignacio off and when the priest says that making the food good is his job and that the food is his duty, Ignacio screams that he will leave and find a better duty elsewhere (and yes, that joke is deliberate and there). He heads into town and finds the guy who attacked him last night. After the two struggle, we learn that the guy's name is Esquleto (Héctor Jiménez) and that he doesn't believe in God, although he will help Ignacio train to wrestle for the prize money they get if they win. Later, we see Ignacio trying to borrow Chancho's sweats, and once he gets them, a funny training montage begins while various orphanage folk look on in confusion. Some time later, we see the pair headed into their first fight, with a mask to hide Ignacio's face on television. The two get trounced by their opponents, but later in the locker room, just as they are telling each other they will never wrestle again, the manager comes in with their five hundred peso cut and says that everyone gets a piece. The two look at each other and split the money, and the next day we see Ignacio serving fancy food to everyone with salad appetizers, giving special consideration to Mary's, although he still seems to make a fool of himself. Meanwhile, we see Esquelto working on an outfit for Ignacio. We see Ignacio trying it on and while he is, Chancho comes up and sees him. Ignacio tries to say it's a man thing, but we can tell that Chancho realizes that Ignacio is a wrestler.
That night, we see Ignacio and Esquelto getting ready for the match when Ignacio comments that they will supposedly be fighting little devils. He fills a bowl with water, sneaks up behind Esquelto, and gives him a....violent....baptism. They go out to the ring and see their opponents, two tiny -- and possibly rabid -- midget wrestlers. The two do okay at first (even though Esquelto does most of the work), but the midgets ultimately triumph. Still, Esqulto and Ignacio get paid, and the two go on a spending spree, with Esquelto getting a total makeover and Ignacio getting a bunch of food for the orphanage...and some snazzy new boots for him. As he is returning to the orphanage, though, he hears a racket in the yard and finds Mary trying to stop two of the boys from wrestling (they saw Ignacio on TV earlier, even though Chancho kept them from seeing it was him). Ignacio tells the boys that it might look like fun, but all the wrestlers do is do it for the money....and the fame....and the glory...and by now he's getting caught up in memories, even though he convinces them to stop. One of the boys pipes up that Ramses is the best, and Ignacio takes offense at this until Chancho says "No he isn't!" and winks at Ignacio.
Anyway, a couple of days pass, and Ignacio confesses to Esquelto that he is in love with Mary. The two plan a date where Ignacio and Mary will be out walking when Esquelto and some friends of his will attempt to mug them, but Ignacio will rip his shirt off (showing his manly muscles to Mary) and teach them a lesson. That night, we see Ignacio and Mary in town, supposedly going to preach the word of God to some bums Ignacio saw earlier, when they reach the spot the attack is supposed to happen. Mary comments on his clothing and why he isn't in a robe, and Ignacio simply says that they are his recreation clothes. Two men walk by, and Ignacio starts shouting at them for no apparent reason. They ignore him until he rips open a jacket belonging to one of them. As Ignacio stands there, Esquelto and his pals come around the corner. Ignacio pales and looks at the two men just in time for one of them to give him a black eye. The next day he is complaining how poorly this went when Esquelto mentions some magic eagle eggs that he heard a gypsy talking about that would supposedly give him super strength. They go for the eggs and Ignacio breaks one of them open and eats it raw....and naturally gets no super powers, even though he does keep getting paid for losing, something which irks him to no end. He declares that they need to go pro to get some real money and proposes sneaking into a party for professional wrestlers that is happening the next night, and despite some trepidations, Esquelto says okay.
The next day, we see Ignacio showing the kids around town when who should they see but Ramses, along with a big guy called Silencio (The Silence) and the two devils that tromped Ignacio and Esquelto earlier. The kids beg for an autograph and Ignacio goes up to try and get one, but gets punched away from Ramses and ends up in a fruit stand. Later that night, we see Ignacio and Esquelto dressing up when the door opens and Mary is standing there, saying they have no food for breakfast tomorrow. Ignacio says he'll take care of it, shuts the door, and he and Esquelto head for the party. They are turned away at the door, so Ignacio boosts Esquelto up and then sneaks in with the band. Esquelto finds Ramses's manager and says that they want to turn pro and finds out about a wrestling match taking place tomorrow night where the winner will take on Ramses. Esquelto turns and finds himself being googly-eyed by Candidia (Carla Jimenez), a rather large woman. He heads upstairs as Ignacio finally arrives inside with the band and while Ignacio improvises his way through a song or two, Esquelto finds Candidia waiting for him (she took a secret tunnel). He bolts and just as she is about to drag him back upstairs, Ignacio -- who just got wine thrown on him by Ramses -- sees what's happening to his partner and tries to free him by knocking the girl out with the bass he was playing on, although he ends up hitting Esquelto instead. The two get ejected and Esquelto starts threatening to quit, but Ignacio convinces him otherwise. Ignacio returns to the orphanage but oversleeps, and in the morning he finds Mary making breakfast. She tells him to take this job seriously, and he starts asking her if wrestling can really be considered a sin like they say. She says if it is for some greater purpose, than it could be okay, but otherwise it is most definitely a sin. She leaves, and he ponders this for a while.
Later that afternoon, we see Ignacio in the church and hear him praying to God for guidance. He asks God if it is okay to wrestle if he gives the money to the kids, and gets a response of sorts...one of the candles falls and sets fire to his robes. He rushes outside and puts out the fire, but now everyone can see his wrestling pants underneath. He tells them that he is Nacho Libre, the great luchadore (Mexican wrestler, and he just gets confused looks for the most part), and he says that he is going to wrestle tonight, and when he wins, he will have money to give the orphans everything they could want. That night, we see him and Esquelto wrestling, and although Esquelto is the second or third (of eight) taken out, Ignacio himself does pretty well, staying in until it's just him and Silencio...that is, until a fan grabs Ignacio's foot and trips him, effectively taking him out. He returns to the orphanage the next day and shrugs, saying, "You can't win them all." He goes into his quarters and finds his stuff all packed up...seems the priests have kicked him out. As he is leaving to go live in the wilderness, Chancho chases after him and gives Ignacio a rusty old sword that once belonged to his mother so Ignacio can maybe have a slight chance of surviving out there. Ignacio thanks him and leaves.
The next day, we see Esquelto riding Ignacio's motorwagon out to where he has set up camp. Ignacio asks how he found him and Esquelto says that he saw Ignacio's camp from the village. Ignacio looks and see a family about a mile away with a little girl waving her hand and saying, "Hi, Nacho!" Ignacio waves and Esquelto tells him that Silencio has been taken out since he somehow broke his foot and can't fight Ramses (probably has something to do with Esquelto running it over with the motorwagon), which means that Ignacio will be fighting him now, since he was in second place. Ignacio reclaims his cast away mask and writes a letter to Mary explaining what he is doing and why and how he feels about her. It is delivered to her that night by Esquelto and she reads it smiling.
That night, we see each wrestler trying to get psyched up -- Ramses by being told he and everything about him is number one, and Ignacio by singing a song he wrote earlier. The two head out to much applause, but Ramses fireworks-filled and hot-chick-escorted entrance is a lot bigger than Ignacio's simple walk down the carpet. The two go into the ring, and Ignacio actually does okay, managing to flip the massive Ramses over his own 5'2" frame. The bell signals the end of a round and the two head to their corners. Ignacio takes a bite out of some watermelon just as Ramses comes up behind him and knocks him aside with a chair. He whales on Ignacio and rips his mask off just as Mary comes in with the orphans, all of whom are dressed in Nacho costumes of their own. He pushes Ramses off with his legs and flips him and then manages to throw him into the stands. He gets up onto the nearest post, positions his body, and swan dives onto the running Ramses, winning the match and the money.
Some time later, we see Ignacio in his casual wrestler outfit driving a bus that is completely covered in drawings of him as Nacho Libre and even has a little Nacho Libre action figure attached. Inside are Mary, Esquelto, and all of the kids. The bus stops and we see that they are on a field trip to old ancient Mexican pyramids. The kids climb to the top of the tallest one and look at the huge view as Ignacio and Mary look at each other and smile at everything he has accomplished, including getting her to love him.
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