In a fairy tale, Princess Moanna, whose father is the king of the underworld, visits the human world, where the sunlight blinds her and erases her memory. She becomes mortal and eventually dies. The king believes that eventually her spirit will return to the underworld, so he builds labyrinths around the world which act as portals, in preparation for her return.

In 1944 Francoist Spain, ten-year-old Ofelia travels with her pregnant mother Carmen to meet Captain Vidal, her new stepfather. Vidal, a Civil Guard officer and devotee of Falangism, has been assigned to hunt down the Spanish Maquis. A large stick insect, which Ofelia believes to be a fairy, leads Ofelia into an ancient stone labyrinth, but she is stopped by Vidal's housekeeper Mercedes, who is secretly supporting her brother Pedro and other members of the Maquis. That night, the insect appears in Ofelia's bedroom, where it transforms into a fairy and leads her through the labyrinth. There, she meets a faun, who believes she is the reincarnation of Princess Moanna. He gives her a book and tells her she will find in it three tasks to complete in order for her to acquire immortality and return to her kingdom.

Ofelia completes the first task — retrieving a key from the belly of a giant toad — but becomes worried about her mother, whose condition is worsening. The faun gives Ofelia a mandrake root, instructing her to keep it under Carmen's bed and regularly supply it with blood, which seems to ease Carmen's illness. Accompanied by three fairy guides and equipped with a piece of magic chalk, Ofelia then completes the second task — retrieving a dagger from the lair of the Pale Man, a child-eating monster. Warned not to consume anything there, she eats two grapes, awakening the Pale Man. He devours two of the fairies and chases Ofelia, but she manages to escape. Infuriated at her disobedience, the faun refuses to give Ofelia the third task.

During this time, Ofelia becomes aware of Vidal's ruthlessness in the course of hunting down the Maquis. After killing two local farmers, Vidal interrogates and tortures a captive member of the Maquis. He asks Doctor Ferreiro to tend to the captive, whom Ferreiro then euthanises at his own urging. Realising that Ferreiro is collaborating with the Maquis, Vidal kills him. He later catches Ofelia tending to the mandrake root, which Vidal considers delusional. Carmen agrees and throws the root into the fire. She immediately develops painful contractions and dies giving birth to Vidal's son.

A discovered spy, Mercedes tries to escape with Ofelia, but they are caught. Ofelia is locked in her bedroom, while Mercedes is taken to be interrogated. Mercedes frees herself, and stabs Vidal non-lethally in her escape to re-join the Maquis. The faun, having changed his mind about giving Ofelia a chance to perform the third task, returns and tells her to bring her newborn brother into the labyrinth to complete it. Ofelia retrieves the baby and flees into the labyrinth. Vidal pursues her as the Maquis launch an attack on a Civil Guard outpost.

Ofelia meets the faun at the centre of the labyrinth. The faun suggests drawing a small amount of the baby's blood, as completing the third task and opening the portal to the underworld requires the blood of an innocent, but Ofelia refuses to harm her brother. Vidal finds her talking to the faun, whom he cannot see. …

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• Ivana Baquero as Ofelia / Princess Moanna, a child who comes to believe she is the reincarnation of a princess from the underworld. Del Toro said he was nervous about casting the lead role, and that finding the 10-year-old Spanish actress was purely accidental. (The film was shot from June–October 2005, when she was 11.) "The character I wrote was initially younger, about 8 or 9, and Ivana came in and she was a little older than the character, with this curly hair which I never imagined the girl having. But I loved her first reading, my wife was crying and the camera woman was crying after her reading and I knew hands down Ivana was the best actress that had shown up, yet I knew that I needed to change the screenplay to accommodate her age." Baquero says that Del Toro sent her many comics and fairy tales to help her "get more into the atmosphere of Ofelia and more into what she felt". She says she thought the film was "marvelous", and that "at the same time it can bring you pain, and sadness, and scariness, and happiness".
• Sergi López as Captain Vidal, Ofelia's new stepfather who serves in the Civil Guard and is a devotee of Falangism. Del Toro met with López in Barcelona, a year and a half before filming began, to ask him to play Vidal. In parts of Spain, López was considered a melodramatic or comedic actor, and the Madrid-based producers told del Toro, "You should be very careful because you don't know about these things because you're Mexican, but this guy is not going to be able to deliver the performance"; del Toro replied "Well, it's not that I don't know, it's that I don't care". Of his character, López said: "He is the most evil character I've ever played in my career. It is impossible to improve upon it; the character is so solid and so well written. Vidal is deranged, a psychopath who is impossible to defend. Even though his father's personality marked his existence—and is certainly one of the reasons for his mental disorder—that cannot be an excuse. It would seem to be very cynical to use that to justify or explain his cruel and cowardly acts. I think it is great that the film does not consider any justification of fascism."
• Maribel Verdú as Mercedes, Vidal's housekeeper. Del Toro selected Verdú to play the compassionate revolutionary because he "saw a sadness in her which he thought would be perfect for the part".
• Doug Jones as the Faun and the Pale Man. As the Faun, Jones guides Ofelia to the fantasy world. As the Pale Man, he plays a grotesque monster with an appetite for children. Jones had previously worked with del Toro on Mimic and Hellboy, and said the director sent him an email saying, "You must be in this film. No one else can play this part but you." Jones responded enthusiastically to an English translation of the script, but then found out the film was in Spanish, which he did not speak. Jones says he was "terrified" and del Toro suggested learning the script phonetically, but Jones rejected this, preferring to learn the words himself. He said, "I really, really buckled down and committed myself to learning that word for word and I got the pronunciation semi-right before I even went in," using the five hours a day he spent getting the costume and make-up on to practice the words. Del Toro later decided to dub Jones with the voice of Pablo Adán, "an authoritative theatre actor", but Jones's efforts remained valuable because the voice actor was able to match his delivery with Jones's mouth movements. Jones's dual casting is intended to suggest that the Pale Man (along with the toad) is either a creation of the Faun or the Faun himself in another form.

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Pan's Labyrinth was premiered at the 2006 Cannes Film Festival on 27 May 2006. Its first premiere in an English-speaking country was at the London FrightFest Film Festival on 25 August 2006. Its first general release was in Spain on 11 October 2006, followed by a release in Mexico nine days later. On 24 November 2006 it had its first general English release in the United Kingdom; that month it was also released in France, Serbia, Belgium, Italy, Russia, Singapore and South Korea. It had a limited release in Canada and the United States on 29 December 2006, before going wide in Canada and the United States on 19 January 2007, in Australia on 18 January 2007, in Taiwan on 27 April 2007, in Slovenia on 17 May 2007 and in Japan on 29 September 2007. Its widest release in the United States was in 1,143 cinemas.

The film was released on DVD on 12 March 2007 in the UK by Optimum Releasing in a two-disc special edition. The film was released in the United States on 15 May 2007 from New Line Home Entertainment in both single-disc and double-disc special edition versions, featuring an additional DTS-ES audio track not present on the UK version. Additionally, the film received a special limited-edition release in South Korea and Germany. Only 20,000 copies of this edition were manufactured. It is presented in a digipak designed to look like the Book of Crossroads. The Korean first edition contains two DVDs along with an art book and replica of Ofelia's key. The German special limited edition contains three DVDs and a book containing the movie's storyboard. Pan's Labyrinth was released for download on 22 June 2007 from Channel 4's on-demand service, 4oD.

High-definition versions of Pan's Labyrinth were released in December 2007 on both Blu-ray Disc and HD DVD formats. New Line stated that due to their announcement of supporting Blu-ray exclusively, thus dropping HD DVD support with immediate effect, Pan's Labyrinth would be the only HD DVD release for the studio, and would be discontinued after current stock was depleted. Both versions had a PiP commentary while web extras were exclusive to the HD DVD version. In October 2016, The Criterion Collection re-released the film on Blu-ray in the US, based on a newly graded 2K digital master supervised by del Toro. An Ultra HD Blu-ray edition of the film was released on October 1, 2019, by Warner Bros. Home Entertainment remastered for 4K.