Po (Jack Black) is a panda who works in a noodle restaurant owned by his goose father Mr. Ping (James Hong), who hopes that Po will one day take over the restaurant, and wishes to disclose to him the secret ingredient of his family's famous noodle soup. Po is a kung fu fanatic with secret dreams of becoming a great master in the discipline. However, his weight, clumsiness, and incredibly large tummy make his goal difficult to attain. The tortoise Master Oogway (Randall Duk Kim) has a premonition that the evil snow leopard warrior Tai Lung (Ian McShane), the former student of his own protégé, the red panda Master Shifu (Dustin Hoffman), will escape from prison and return to threaten the Valley of Peace. While Shifu sends Zeng (Dan Fogler), a messenger goose, to Chor Ghom Prison to have the security increased, Oogway orders a formal ceremony to choose the Dragon Warrior, a supreme master of kung fu who can defeat Tai Lung. It is assumed that one of the Furious Five — Tigress (Angelina Jolie), Monkey (Jackie Chan), Mantis (Seth Rogen), Viper (Lucy Liu), and Crane (David Cross) — a quintet of supremely skilled martial artists trained by Shifu, will be chosen for this honor. Po, in his attempts to see the Dragon Warrior, finds himself in the middle of the ceremony. Oogway surprises everyone by designating Po himself as the Dragon Warrior, despite Po's protests and Shifu's pleas to reconsider.
Revolted at having Po under his tutelage, Shifu attempts to make him quit by berating and humiliating him through torturous training in the Great Training Hall, which has been fitted with shackles, chains and spikes; the Five also dismiss Po as a worthless interloper. Taking sage advice from Oogway himself, Po endures their abuse willingly, eventually endearing himself to most of them with his determination, good cooking and sense of humor. Tigress later reveals to Po how Tai Lung came to be evil. Shifu raised him from his days as a young cub and treated him like his own son. Tai Lung was also one of Shifu's best students. When Oogway refused to make Tai Lung the Dragon Warrior, Tai Lung became enraged and ravaged the Valley. He then tried to take the Dragon Scroll; Shifu intended to stop him, but could not bear to fight what he had created through his love. Tai Lung was then defeated by Master Oogway and imprisoned for two decades. Tigress tells Po that Shifu loved Tai Lung like he never loved anyone before, or since.
Meanwhile, Zeng's errand backfires when a tour of the prison given to him by the overly confident head of security, Commander Vachir (Michael Clarke Duncan), inadvertently enables Tai Lung to escape. Tai Lung orders Zeng to send word of his arrival to Shifu. In the Valley of Peace, Oogway passes away in a swirl of peach petals, his final wish being that Shifu must train Po. However, Po confesses his belief that he may never be a match for Tai Lung. Overhearing this discussion, Tigress takes it upon herself to intercept Tai Lung, and the rest of The Five follow her to assist. The following morning, Shifu discovers that Po is capable of impressive physical feats when motivated by food. He leads Po to the countryside for an intensive training regime in which Po is offered food as a reward for learning his lessons. As Shifu hopes, Po swiftly becomes a skilled combatant.
The Five battle Tai Lung on a rope bridge over a large canyon. Although they manage to hurl him from it bound by severed ropes, they are defeated when he manages to swing back to their side of the canyon and unleashes his special nerve-striking technique. All except Crane are paralyzed by the move, and he manages to carry his friends back to the Valley. (Tai Lung allowed them to return alive to intimidate Shifu and Po.) When they return, Shifu decides Po is ready to open the sacred Dragon Scroll, which promises great power to its possessor. However, when Po opens it, he finds nothing but a blank reflective surface. Stricken with despair at the scroll's apparent worthlessness, Shifu orders his students to lead the villagers to safety while he stays to delay Tai Lung for as long as he can.
Po meets up with his father, who tells him the secret ingredient of the family's noodle soup: nothing. He explains that things become special when people believe they are. Realizing that this is the entire point of the Dragon Scroll, Po rushes off to help Shifu. At this time, Tai Lung arrives at the palace to take the Dragon Scroll. While battling Shifu, he discovers that the Dragon Scroll is gone, and attempts to kill Shifu in anger. But before he can, Po arrives and challenges him. After thwarting several of Tai Lung's attempts to take the Dragon Scroll with his unique and humorously improvised strategies, Po is temporarily stunned and Tai Lung takes it. However, he is unable to understand its symbolism. Po tries to explain the wisdom of the scroll to a frustrated Tai Lung, who uses his nerve attack on Po. But the panda is impervious thanks to his amply-padded body. Emboldened, Po counter-attacks, and uses the Wuxi Finger Hold (a technique Shifu had previously threatened to use on Po) on Tai Lung, defeating him in a large explosion of golden light that ripples through the valley.
The Five return to the valley to investigate and find a slightly dazed but triumphant Po. Deeply impressed by Po's victory, Tigress leads the Five to acknowledge him as a Kung Fu master. Po suddenly remembers that Shifu is wounded, and rushes back to his master's side. At first Shifu appears to be dying, and Po panics. But Shifu (almost forgetting the respect he has gained for Po) reveals that he is only experiencing inner peace for the first time in years.
At the end of the credits, Shifu and Po are seen eating dumplings together beside the Sacred Peach Tree. A peach seed planted by Oogway before his death has sprouted into a new plant.
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