In a world populated by Mobians, the final race of the Piston Cup season ends in a three-way tie for first place between retiring veteran Shadow the Hedgehog, frequent runner-up Ash the Hedgehog, and brash rookie sensation Sonic the Hedgehog; the tiebreaker race is scheduled for one week later at the Mobotropolis International Speedway. Sonic is desperate to win the race, not only to be the first rookie to win the Piston Cup, but also because it would allow him to leave the unglamorous sponsorship of Fighters, a bumper ointment company, and take Shadow's place on the prestigious and lucrative G.U.N. team. However, he struggles to work with others due to his selfishness, which has caused him to fire three crew chiefs and having his pit crew quit after the race. Eager to get to Angel Island as soon as possible, he pushes Muttski, to travel all night long. While Sonic is sleeping, Muttski nods off and is startled awake, causing Sonic to fall out the back of the trailer and onto the road with his race car. Sonic wakes up in the middle of traffic and speeds off the highway in search of Muttski, but instead ends up in the rundown desert town of Knothole, where he inadvertently damages the pavement of the main road.
The next day, Sonic is ordered by the town judge and medical doctor, Charles the Hedgehog, "Chuck", to leave town immediately, but the local lawyer, Sally Acorn, requests that Sonic should instead be assigned community service to repave the road, to which Chuck reluctantly agrees. Still in a rush to leave town, Sonic repaves the road shoddily, and is ordered to start again. During this time, he begins to warm up to the town, and befriends several of its residents. He learns that Knothole was once a popular stop until it was bypassed with the construction of a freeway and mostly forgotten, and that Chuck was Thunder Strike, a three-time Piston Cup champion whose career ended from a devastating crash in 1954. Also, that he is his long-lost uncle. He bonds with Sally, who found happiness when she gave up a fast life in Angel Island to live in Knothole, and now dreams of putting the town back on the map. Sonic finishes repaving the road, reinvigorating the town's residents, and decides to spend an extra day in Knothole with his new friends, but his time there is cut short when Muttski and the media descend on the town. Sonic reluctantly leaves to reach Mobotropolis in time for the race while Sally expresses her disappointment with Chuck upon discovering that he was responsible for tipping off the media to Sonic's whereabouts, and she and the others, sad about the departure of their new friend, go to sleep, while Chuck, alone by the traffic light, regrets his actions.
At the race, as Sonic couldn't say goodbye to his friends, races distractedly and ends up with one lap behind. He is then surprised to discover that Chuck, having a change of heart, has taken over as his crew chief and several of his other friends from Knothole are helping in the pit. Inspired and recalling tricks he learned from Chuck and his friends, Sonic manages to recover and vaults into the lead. On the final lap, Ash sideswipes and sends Shadow into a dangerous crash. Recalling Chuck's fate, Sonic stops just short of the finish line, handing Ash the victory, and drives back to push Shadow over the finish line. As a result, the angered crowd and media condemn Ash's victory but praise Sonic's sportsmanship. Sonic is offered the G.U. . sponsorship, but declines and insists on staying with Fighters out of loyalty for their past support. Back at Knothole, Sonic reunites with Sally and announces that he will be setting up his racing headquarters there, putting Knothole back on the map.
