Dr. Robert Verne (Robert Foxworth) is a crusading physician working with the Environmental Protection Agency (EPA). He is sent by them to northern Maine to issue an environmental report on forest lands claimed by both the local Indians and the Pitney Paper Company. He asks his wife, Maggie (Talia Shire), the lead cellist of the Washington Symphony, to accompany him. Maggie is looking for an opportunity to tell her husband that she is pregnant, afraid that he will insist on an abortion, because in principle, he is against bringing another child into the overcrowded world. The Vernes take up residence in a remote lakeside cabin in the disputed forest. They hear from Mr. Isley (Richard Dysart), manager of the paper mill, that the Indians are suspected of killing a number of lumberjacks who have disappeared in the forest. Dr. Verne fishes in the lake and is amazed when he sees an oversized salmon. That night, an enraged raccoon invades their cabin, and Dr. Verne kills it.
John Hawks (Armand Assante), the local tribal leader, invites the Vernes to tour the forest. M’Rai, an Indian elder, tells him how things grow to giant size in certain ponds. He also tells about the legend of Katahdin, a mythical monster who supposedly will arise someday to protect the Indians. Hearing about the high rate of deformity from Ramona, a midwife, Dr. Verne becomes suspicious that the paper mill is somehow polluting the land. Isley gives him a tour of the mill, which appears to be operating safely. However, Maggie picks up a silvery substance on her shoe that indicates use of methyl mercury, a chemical that was once used in the paper industry as a cheap caustic solution. Use of methyl mercury had been banned since 1956, when thousands of people suffered from environmental contamination in Minamata, Japan. Maggie is horrified to learn from her husband that the poison concentrates on fetal tissues whenever a pregnant animal (or human) eats any contaminated food. Since Maggie ate the fish from the lake, she believes her unborn child may have become infected.
When Dr. Verne takes blood samples from the Indian villages, Isley shows up with the police chief to arrest John Hawks for the murder of a family of hikers who were found torn to pieces. When the Indian flees, Dr. Verne and his wife fly by helicopter to a prearranged spot to meet him. Maggie finds a dying, mutated bear cub trapped in a net by a river. Dr. Verne considers this to be positive proof of methyl mercury pollution. He summons Isley and the police chief to meet them at a teepee shelter where he is trying to keep the cub alive. Maggie reveals her pregnancy to her husband, explaining her fears that her infant might be born a freak. Isley is stunned when he sees the baby monster, realizing that the people murdered in the forest were not harmed by the Indians but by a mutant bear. He confesses that the mill had used the forbidden chemical.
The monster, called Katahdin by M’Rai, launches its attack. The remainder of the film features the people fleeing the wrath of Katahdin. One by one, the police chief, the helicopter pilot, Isley, M’Rai, and John Hawks fall victim to the monster. Hawks wounds it with an arrow, and Dr. Verne manages to kill the creature, stabbing it through its eye. As Maggie and her husband fly home, another mutant bear is seen roaming through the forest below.