The Return of the Pink Panther is the second film in the Pink Panther series, featuring the return of Peter Sellers as the role of Inspector Clouseau, and Herbert Lom as Chief Inspector Charles Dreyfus. The film also heavily focuses on the return of the character Sir Charles Lytton (the notorious Phantom), now played by Christopher Plummer rather than David Niven. The Pink Panther diamond once again plays a central role in the plot.

As the film begins, Clouseau's bumbling results in him being demoted to a beat cop by his boss, Chief Inspector Charles Dreyfus (who despises Clouseau to the point of obsession). However, the French goverment forces Dreyfus to reinstate Clouseau as a detective so he can go to the middle eastern nation of Lugash and investigate the theft of the fabled Pink Panther diamond, which has once again been stolen.

Clouseau's investigations lead him to believe that Charles Lytton, the notorious Phantom, is once again up to his old tricks and is the culprit responsible for once again stealing the Pink Panther. Although Clouseau completely fails to discover ANY leads into the theft, his bumbling allows him to survive several attempts on his life by a mysterious assassin (including bombs, sniper attacks, and sabotaging of Clouseau's car brakes). Clouseau is eventually tricked into leaving Lugash completely, following Lytton's wife to a resort hotel in Switzerland, where his bumbling attempts to investigate her only result in repeated failure.

Meanwhile, Sir Charles Lytton reads about the theft and realises that he's been framed. He goes to Lugash to investigate the theft, having various encounters with underworld figures there and fighting his way out of several attempts on his life. Lytton eventually manages to discover the identity of the true thief: none other than his life, Lady Lytton, who has apparently grown bored with their quiet retirement. Lyttons makes a daring escape from Lugash (both from the underworld and the Lugash Secret Police), and goes to the resort in Switzerland to find his wife and the diamond.

Inspector Clouseau, who by sheer coincidence has unknowingly been on the trial of the real thief all along, receives a phone call from Chief Inspector Dreyfus to arrest Lady Lytton. However, when Clouseau tries to call Dreyfus back to inquire as to why he wants Lady Lytton arrested, he finds out Dreyfus has been on vacation and is not in the office. It is soon revealed that Dreyfus is the assassin that has been trying to kill Clouseau, and he is prepared to shoot Clouseau with a sniper rifle as soon as he steps into Lady Lytton's room.

Lytton gets together with his wife, who playfully confesses to the theft and hands the diamond over to Lytton. However, the two of them are cornered by Colonel Sharky of the Lugash Secret Police, who intends to kill them both (Lugash has been using the theft of the diamond as an excuse to purge their political opponents). Suddenly, Clouseau barges into the room. After Clouseau making a huge scene over arresting the Lyttons, Sir Charles points out to Clouseau that Colonel Sharky is going to kill them all. Clouseau buffoonishly attempts to arrest Sharky. Suddenly, Dreyfus opens fire on the room, and manages to accidentally kill Sharky while aiming at Clouseau (who ducks at the last minute to check his fly).

For his work in recovering the Pink Panther, Clouseau is promoted to Chief Inspector. Dreyfus is committed to a sanitarium, where he is strait-jacketed and placed inside a rubber room. Sir Charles Lytton comes out of retirement, and continues to operate as the Phantom. The movie ends with Dreyfus holding a crayon between his toes so that he can write "KILL CLOUSEAU" on the wall of his cell, while the animated Pink Panther appears to film him.