Dead Island takes place on the fictional island of Banoi, located off the coast of Papua New Guinea, the home of a large tropical resort hotel. The night after a high-profile party, the four main characters—rapper Sam B., hotel desk clerk and spy for the Chinese government Xian Mei, former football star Logan, and former police officer Purna—are awakened by a voice over the emergency intercom system directing them to evacuate the hotel. They discover that much of the population of the island have been taken by a contagious infection that has turned them into zombie-like creatures. Briefly overcome by the infected, they are rescued by lifeguard John Sinamoi and James Stein, who believes them to be immune to the infection. Upon the survivors waking up in a hut, they help a besieged Sinamoi. After aiding Sinamoi and several other guests he rescued to reach a secure lifeguard station and call for help, Sinamoi requests they travel to the nearby city of Moresby to obtain food and supplies while they await rescue. After assisting survivors, they meet the other lifeguard, James Stein, who helped them earlier. In return for aiding his group, he gives the survivors equipment for their radio. Sinamoi soon decides to have the survivors take an armored car from the hotel's garage. The four then travel to a nearby auto garage where they meet Earl, the owner, who has recently been bitten by the infected. He maintains his humanity long enough to create an armored vehicle that will allow them to safely reach the city, and requests that they take his adopted daughter, Jin, along to prevent him from attacking her once he turns.
Upon arriving in Moresby, they discover a horde of infected attempting to break into a barricaded church where another group of survivors is hiding. After the four kill the infected, the church survivors inform them that while much of the city has been overrun, a violent street gang called the Raskols has secured the police headquarters. The church group's leader, Mother Helen, requests that the four help restore the church's water supply by repairing fire hydrants and entering the sewers and reactivating the neighborhood's pump system. After doing so, the group travels through the sewer tunnels to reach city hall, where several of the island's top politicians, along with the mayor of Moresby, have holed up, but they refuse to assist the other survivors in any way. The main characters attempt to regroup to decide their next plan, which is to supply survivors with supplies raided from the supermarket guarded by gangs, and when they return to city hall, they find it has been overrun with infected, which were able to enter the building through the tunnels after the four drained the reservoir by activating the church's water pump. They return to the church and learn that Jin attempted to help the gang at the police station but was kidnapped, and they are forced to mount a rescue for her. After infiltrating the police station, they kill the gang members and rescue Jin who, as it was implied (and later confirmed in the novelization), was raped.
After acquiring supplies, the main characters return to the hotel, where the voice contacts them again. The voice identifies himself as Colonel Ryder White, a Banoi Island Defense Force (BIDF) commander, currently trapped in a prison located on Banoi, accessible only through the jungle. He states that due to the characters' immunity, he may be able to obtain an anti-virus to cure his wife of the infection. The group assists a small survivor encampment in the jungle and meet Mowen. Mowen does not know how to get to the prison, but instead takes the players to the location of a secure bio-research facility on the island; the researchers there have been examining a native cannibalistic tribe where they believe the infection may have started from. They affirm that the characters' blood type helps to make them immune to the infection, but at the same time, realize that an anti-virus cannot be created. Under direction by the scientists, the group rescues a native woman, Yerema, who was about to be sacrificed by the tribe. She willingly returns with the group to the laboratory to allow herself to be examined.
After completing tasks for Mowen and returning Jin to her home to put down her infected father, the characters return to the laboratory and find that the infected test subjects had been accidentally released and the scientists wiped out. They rescue Yerema and recover the sample of vaccine that had been created. With Yerema's help, the group, Mowen, and Jin travel to the prison to meet with White. They find that a number of prisoners have survived the infection, and are given their aid in arming themselves to get to White. When they reach an elevator to travel to White the four are informed by Yerema and Jin that Mowen was killed by the infected while helping them get to the elevator, the elevator is suddenly filled with knockout gas. The characters are awoken by Kevin, a technology-savvy prisoner, who reveals that White has stolen the vaccine and is attempting to flee, while readying to detonate a nuclear explosive to wipe out the island. The group races to the roof and confront White, who refuses to hand over the vaccine. Jin releases White's wife from a restraining harness, forcing White to defend himself. His wife bites him, infecting him, and he shoots both her and Jin before taking the vaccine. However, the vaccine's formula is flawed, and White becomes an inhuman monster, and the group is forced to kill him. The group escapes Banoi in White's helicopter along with Yerema and Kevin, and as they travel to Sydney they ponder the fate of the world.