A young couple, Ganga (Shobana) and Nakulan (Suresh Gopi), arrives at the tharavadu called Madampilli of the latter. Hailing from a family that follows tradition and superstitions, Nakulan's uncle Thampi (Nedumudi Venu) objects to the couple's idea of moving into the allegedly haunted mansion, which Nakulan ignores. The couple move in anyway, following which seemingly supernatural events begin to happen. The mansion that Nakulan and Ganga are living in, was occupied in ancient times by Sankaran Thampi, a cruel ancestor and karanavar (head) of the tharavadu who had imprisoned a famous Bharatnatyam dancer, Nagavalli, from Tamil Nadu. There she pines away for her lover Ramanathan, who arrives, attempting to rescue her. Learning of their affair and their plan to elope, Sanakran Thampi murders Nagavalli in her room at the mansion. Legend has it that on the eighth day of the Durgashtami (an annual Hindu celebration), Nagavalli returns as a blood-thirsty spirit, intent on killing the chieftain and drinking his blood. With the aid of sorcerers, Nagavalli's spirit is locked up in a section at the mansion (Thekkini). Not long after, Sankaran Thampi commits suicide and his spirit is also locked up in the Thekkini. Both spirits are believed to be haunting the Thekkini, in which they are locked up by means of an ornate enchanted lock (Manichitrathazhu, hence the title of the movie). After moving in, mostly out of curiosity, Ganga manages to unlock the Thekkini, only to find ancient valuables such as jewellery, etc. Upon learning about the unlocking of the Thekkini, fearing the spirits are on the loose, Nakulan's uncle Thampi and family move in to the mansion to try and re-seal the Thekkini lock, while also looking out for Nakulan and Ganga. However, various unclear sightings of a woman are witnessed around the mansion, along with attempted attacks on various people at the mansion, including Nakulan and Ganga. While most of the family including Thampi believe that Nagavalli's ghost roams the mansion, Nakulan, disapproving of supernatural theories, suspects Sreedevi of being mentally ill, hence orchestrating the incidents at the mansion. Hearing of this, Thampi and the family fear that Sreedevi might be possessed by Nagavalli's spirit. Sreedevi (Vinaya Prasad), Nakulan's cousin and Thampi's daughter, according to tradition, was to be married to Nakulan; however, after finding that Sreedevi had an ominous horoscope, Nakulan's mother withdrew from this proposal, and got Nakulan married to Ganga; later, Sreedevi entered a marriage which was short-lived. Sreedevi's tragic history, along with her perceived gloominess, and her being the only person present during an attack on Ganga, lays cause for suspicion of her. Dr. Sunny Joseph (Mohanlal), a brilliant yet frolicsome Psychiatrist and Nakulan's close friend, is called in to investigate. Soon enough, Sunny finds out that Nakulan's conclusions are not as obvious, and he uncovers a plan to commit a murder during the upcoming Durgashtami Festival. Sunny's trained psychiatric mind begins to suspect that Ganga could well be the Ghost of Madampilly. He investigates Ganga's history. Ganga grew up in a highly superstitious family and had partaken in various religious rituals. She was unable to come to grips with the fact that her parents were moving the family to Calcutta and chose to stay in the ancestral house, instead. It was a period of great emotional and psychological turmoil for her, and she became afflicted with multiple personality disorder. Madampilly with its share of superstitions and dark tales evokes memories of the olden days in her, and she slowly develops the personality of Nagavalli after having sympathised with her. Meanwhile, Thampi, having lost faith in Sunny, calls in renowned tantric expert Brahmadattan Namboothirippad (Thilakan) to rid his family of the supernatural menace. As fate has it, both the Namboothirippad and Sunny are old acquaintances and mutually admire each others' expertise in their respective fields. At his own risk, Sunny reveals the secret to Nakulan and Ramanathan. In one of the more memorable scenes of the movie, Ganga also gets to know about her illness during a manifestation of her hidden personality, that of Nagavalli. Sunny, with help of the Namboothirippad, plans an elaborate Tantric ceremony to invoke Ganga's Nagavalli persona and make it believe that it will kill Sankaran Thampi. The plan is put into action and in a fiery climax, the blood thirsty Nagavalli exacts revenge on the cruel Karanavar. Ganga wakes up from her hypnotic sleep and learns that she is completely cured of the illness. Sunny expresses his intent to marry Sridevi, and they all drive off happily.