The curtain rises on a grim scene: Dandy Dan's Gang (the Hoods), including Bronx Charlie, is hunting down members of rival mobster, Fat Sam's, Gang and splurging them
 with a mysterious new device that fires a lethal dose of whipped cream! In 1940s movie voiceover style, Bugsy Malone comments on the scene.

The Chorus Girls introduce Bugsy to the audience ("Bugsy Malone"), and he invites us into Fat Sam's speakeasy ("Fat Sam's Grand Slam"), where he is smitten with Blousey Brown, a new girl auditioning to be a singer at the club, but she brushes him off. The Hoods enter once more, looking for someone. Chaos breaks out and Knuckles, Fat Sam's sidekick, takes some whipped cream to the arm, but the Hoods are able to make their escape before getting caught. Behind closed doors, Fat Sam and his gang
 plan a defense against the terrifying new splurgers and the mastermind behind the attacks, Dandy Dan.

After the attack at the club, Bugsy convinces Blousey to go out to dinner in 
an attempt to win her affections. Bugsy reveals that, despite his tough exterior, he is not a crooked hoodlum. The two narrowly miss another splurging, taking shelter under their cafe table.

Rival gang leader (and heir to the custard pie recipe perfected by the Marquis de Meringue), Dandy Dan, considers his next move and celebrates his splurges ("That's Why They Call Him Dandy"). Meanwhile, back at the Grand Slam, Fat Sam and his girl, showbiz sensation Tallulah, are headed out on the town. Fizzy is mopping up the mess at the club and reminds Fat Sam that he promised Fizzy an audition the day before. Fat Sam puts off the request, saying, "Tomorrow, Fizzy." Fizzy sings of his dream to be in showbiz ("Tomorrow").

Oscar De Velt is auditioning replacements for his big show at the Bijoux Theatre after his star and girlfriend, Lena Marelli, has walked out (yet again). Blousey attends the audition, but just as she hits the stage, Lena struts back in and tells Oscar she'll give him one more chance ("Show Business"). Bugsy comforts the dejected Blousey and tells her he
 can get her an audition at Fat Sam's, but Hollywood is where she really ought to be.

Fat Sam's gang enters, reveling in being bad ("Bad Guys"). Fat Sam explains that, to have any hope against their rivals, they need to get their hands on a splurger, and leaves his gang to figure out how to accomplish this, exiting with Knuckles. Just then, Dandy's gang enters and splurges them all.

In an attempt to hide his fear and act normal, Fat Sam agrees to let Blousey audition. Blousey and Tallulah's girls, Loretta, Dotty, Bangles and Tillie, go off to get ready, leaving Tallulah to flirt with Bugsy. Blousey returns for her audition and catches them. Upset, but driven, Blousey still auditions ("Ordinary Fool") and is a sensation. Fat Sam gives her a part in the show, then asks to see Tallulah's new number ("My Name Is Tallulah").

Afterward, Fat Sam offers Bugsy $400 to find him a new gang. Bugsy accepts, excited to use the money to move to Hollywood with Blousey, despite the fact that she is still angry with him.

Bugsy visits a breadline on the dock, full of Down and Outs who need 
work ("Down and Out"). Two Delivery Guys begin unloading a shipment full of splurgers intended for Dandy Dan. Bugsy offers the Down and Outs jobs with Fat Sam and, hungry for work and food, they agree. Bugsy sets them off to steal the crates and run!

Bugsy earns his $400 and is about to buy his tickets to Hollywood, when he overhears Dan plotting to take over Fat Sam's place. Realizing that two gangs outfitted with splurgers could equal disaster for everyone, Bugsy shares his plan for a less messy outcome with Fat Sam, who agrees to give it a try ("Fat Sam's Grand Slam – Reprise"). Dan's gang busts in, and a standoff occurs, during which, Bugsy convinces the two gangs that they're more powerful as friends than enemies ("You Give a Little Love"). Bugsy presents Blousey with the tickets, and the two embrace as the curtain falls.