In Italy during World War I, the carpenter Geppetto inadvertently loses his son, Carlo, during an aerial bombardment by Austro-Hungarian forces. Geppetto honors his memory by planting a pine cone that Carlo found for him near his grave and refuses to move on from his death for over twenty years.

An anthropomorphic cricket named Sebastian J. Cricket takes residence in the resulting pine tree. Geppetto cuts the tree down drunkenly to make a new son out of its wood. Unfortunately, he passes out drunk, leaving the puppet unfinished, and a blue Wood Sprite brings it to life, christening him Pinocchio. The Sprite meets Sebastian and promises to grant him a wish, which he intends to use to become famous, in exchange for acting as Pinocchio's guide.

Geppetto later discovers that Pinocchio is alive. Terrified and distressed by Pinocchio's curious antics, Geppetto locks him in a closet while he goes to church. Unfortunately, Pinocchio escapes and follows him into the church, frightening the villagers. The next day, Geppetto sends Pinocchio to school, but the puppet is intercepted by a man and his performing monkey, aristocrat-turned-showman Count Volpe and Spazzatura, respectively.

Count Volpe convinces Pinocchio to join his circus and gets him to sign a contract. However, after Geppetto arrives to take him home, he and Volpe have a tug-of-war that results in Pinocchio being thrown to the road, where he is hit by a car. Due to this, Pinocchio is sent to the afterlife, where he meets the Black Rabbits. He is then sent through the doors to meet Death, the sister of the Wood Sprite. She explains to Pinocchio that he is immortal and will return to the mortal realm once an hourglass has emptied, cautioning that the time he spends in the afterlife will increase each time he returns.

Returning to the mortal realm, Pinocchio decides to join Volpe's circus to earn money for Geppetto and avoid being conscripted into the Regio Esercito (Italian Royal Army) during the Second World War by the strict village Podestà. However, Volpe secretly keeps the money to himself, which Spazzatura privately tells Pinocchio through his puppets. When Volpe discovers it, he tries to beat up Spazzatura until Pinocchio attempts to defend him.

When Sebastian and Geppetto search for Pinocchio at sea, they are swallowed by a giant sea monster. During one of his performances, Pinocchio sings a disparaging parody of a patriotic song to Benito Mussolini as revenge for Volpe's abuse. Outraged by the performance, Mussolini ordered Pinocchio executed and the circus burned.

Once revived, Pinocchio finds himself taken by the Podestà to a training camp where other small boys are trained to fight in the war. Pinocchio befriends Podestà's son, Candlewick, who is scared of disappointing his father and being seen as weak. After a training game between two boys' teams ends in a tie, Podestà orders Candlewick to shoot Pinocchio, but Candlewick refuses. During their confrontation, the training camp gets bombed by Allied aircraft, killing the Podestà. The blast of the bomb causes Pinocchio to be thrown into the air.