The violent criminal element of the Corleone family has been largely abandoned, ostracized by Michael as well as the public, which no longer romanticizes the gangster lifestyle. In an attempt to break with the past, Michael creates a charity, the Vito Corleone Foundation, in memory of his father. At a ceremony in St. Patrick’s Cathedral, presided over by Archbishop Gilday, Michael is named a Commander of the Order of St. Sebastian.
At the lavish party following the ceremony, Kay and Michael have a somewhat uneasy reunion. Anthony tells his father that he is going to drop out of law school to pursue a career as an opera singer. Kay supports his choice, but Michael disagrees, wishing that his son would finish law school or join the family business. Michael eventually acquiesces to Anthony's wishes. Meanwhile, Vincent Mancini-Corleone, Sonny Corleone’s illegitimate son, shows up at the party. He is embroiled in a feud with Joey Zasa, the Corleone family's mafioso muscle. What remains of the old Corleone criminal empire — once the most powerful Mafia family in the nation — is now under Zasa's stewardship. However, the Corleones' old neighborhood in Little Italy is in ruins, and has become a slum. In Michael's study, Vincent and Zasa tell him about their feud. The discussion grows violent, with Vincent accusing Zasa of mocking Michael behind his back. Michael makes it clear that he is not "a gangster" and that whatever bad blood exists between Vincent and Joey Zasa is none of his business, and must be settled between only them. He asks the two men to make peace with one another. The two men embrace, but Zasa insults Vincent by whispering "bastardo" in his ear. Enraged, Vincent bites off part of Zasa’s ear. Zasa is escorted out and Michael scolds Vincent for losing his temper, but is nevertheless impressed by Vincent's passionate loyalty to protect him. Michael agrees to take his nephew under his wing. The party concludes with a family picture where Michael asks Vincent to join the rest of the family. That night, two men break into Vincent’s home, after Vincent has spent the night with a journalist (Bridget Fonda). Vincent kills one in order to frighten the other into revealing Zasa as the man who sent them, then kills him. Michael seeks to buy the Vatican's shares in Immobiliare, an international real estate holding company. He negotiates the transfer of $600,000,000 to the Vatican Bank with Archbishop Gilday, who has plunged the Holy See into tremendous debt through his poor management and corrupt dealings. While in Vatican City, Michael learns that several influential parties oppose the deal for many reasons, not the least of which is the extensive criminal history.
Don Altobello, elderly New York mafia chief of the Tattaglia crime family, tells Michael that his old New York partners of The Commission want in on the Immobiliare deal. A meeting is arranged in Atlantic City, New Jersey, and Michael appeases most of the mafia bosses with generous payoffs. Zasa, however, gets nothing. Furious, he declares that Michael is his enemy. Zasa storms out of the meeting while Altobello tries to cool him down, thus leaving the meeting. Minutes later, a helicopter hovers outside the conference room and sprays a barrage of bullets through the ceiling windows. Almost all other mob bosses are killed, but Michael, Vincent and Michael's bodyguard, Al Neri, escape. Back at his apartment in New York, as Michael considers how to respond to this hit, he suffers a diabetic stroke, and is hospitalized. Near-delirium, Michael screams out the name of his brother Fredo just before he is loaded on an ambulance to the hospital.
Though they are cousins, Vincent and Mary begin a romantic relationship. Unbeknownst to Michael, Vincent, with the urging of his aunt Connie, plots revenge against Joey Zasa. During a street fair on Independence Day, Vincent and his accomplices kill Zasa's bodyguards, and Vincent murders Zasa himself while disguised as a police officer. Michael, still hospitalized, berates Vincent when he finds out. Michael insists that Vincent end his relationship with Mary because Vincent’s involvement in the family puts Mary's life in jeopardy. Vincent agrees. In Sicily, Michael tells Vincent to speak with Don Altobello and to intimate to him his intentions of leaving the Corleone family. Altobello supports the idea of Vincent switching his allegiance, and introduces him to Licio Lucchesi, the man behind the plot to prevent Michael’s acquisition of Immobiliare. Michael visits Cardinal Lamberto to speak about the Immobiliare deal. Lamberto convinces Michael to make his first confession in nearly 30 years; in which he confesses to ordering Fredo's murder.
Touring Sicily with Kay, who has arrived for Anthony’s operatic debut, Michael asks for her forgiveness. As both admit that they still love each other, Michael receives word that Don Tommasino, his Sicilian friend and ally of the Corleone Family for half a century, has been assassinated, signaling that a new round of violence is about to begin. Cardinal Lamberto is elected Pope John Paul I, which means that the Immobiliare deal will likely be ratified, due to his intention to "clean up" the dealings of the Vatican. The new Pope's intentions come as a death knell to the plot against the ratification of the Immobiliare deal, prompting frantic attempts by the plotters to cover their own tracks. Vincent tells Michael what he has learned from Altobello: Lucchesi is behind the plot against the Immobiliare deal, and a master assassin known as Mosca da Montelepre (the man who killed Tommasino), has been hired by Altobello to kill Michael. Vincent wants to strike back, but Michael cautions him, saying that if he goes ahead with such a plan, there’ll be no going back. Vincent insists on revenge, and Michael relents. He makes Vincent head of the Corleone family. In exchange, Vincent agrees to put an end to his relationship with Mary.
The family travels to Palermo to see Anthony perform the lead in Cavalleria Rusticana at the renowned opera house Teatro Massimo. Meanwhile, Vincent makes plans to seek revenge against the Corleone family's enemies. Interspersed with scenes from Anthony’s performance are the brutal murders of the enemies of the Corleone family.
Michael watches the opera while:
Mosca, the assassin hired by Don Altobello to kill Michael, descends upon the opera house during Anthony's performance, killing three of Vincent’s men, but the opera ends before he has the chance to kill Michael. The assassin retreats to the opera house facade’s staircase, and tries to shoot Michael there. At the same moment, Mary is confronting her father about the forced break-up with Vincent, when two shots ring out. The first hits Michael in the shoulder. The second hits Mary in the heart, and she dies calling out to her father. Vincent then kills the assassin with a single shot. As Kay cradles Mary's bloody body in her arms, Michael screams in agony, a broken man.
The scene dissolves to a short montage of Michael's memories, the first being a dance with Mary, the second being a dance with his first wife, Apollonia, and the last being a dance with Kay — symbolizing the women he has lost. The film ends in an unspecified year (later stated in a timeline included in The Godfather DVD box set as 1997), showing an aged Michael, seated in the front yard of his Sicilian villa. He slowly puts on a pair of sunglasses, drops an orange from his hand, slumps out of his chair, collapses to the ground, and slowly dies, completely alone. A small dog sniffs around his body and the screen cuts to black.
However, several scenes later, after the death of Don Tommasino, Michael relents "You were so loved, Don Tommasino. Why was I so feared, and you so loved? What was it? I was no less honorable. I wanted to do good." Then, as Michael cries, "What betrayed me? My mind? My heart? Why do I condemn myself so?" Then, in prayer, "I swear, on the lives of my children: Give me a chance to redeem myself, and I will sin, no more." This scene directly sets up the ending of the film as Michael finally receives his chance at redemption, and as he hands the Corleone family to another as violent as he was (Vincent) and since fans assume Vincent turns the Corleone family into a ruthless and violent drug cartel which contradicts every thing he swore to do (redeem the Corleones), and as he swore on the lives of his children, he dies alone, an old man, redeemed only after paying the ultimate price for his sins: his daughter's death.
Al Pacino, Diane Keaton, and Talia Shire reprised their roles from the first two movies. According to Coppola's audio commentary on the film in The Godfather DVD Collection, Robert Duvall refused to take part unless he was paid a salary comparable to Al Pacino. On an episode of Inside the Actor's Studio, he commented he understood Pacino was the star but the difference between their salaries was so great it was insulting. When Duvall dropped out, Coppola rewrote his screenplay to portray the Hagen character as having died before the story begins. Coppola created the character "B.J. Harrison", played by George Hamilton, to replace the Hagen character in the story. The director further states that, to him, the movie feels incomplete "without [Robert] Duvall's participation." According to Coppola, had Duvall agreed to take part in the film, the Hagen character would have been heavily involved in running the Corleone charities.
Coppola felt that the first two films had told the complete Corleone saga. It was only his perilous financial status, after the failure of a big-budget movie, that compelled him to take up Paramount's long-standing offer to make a third installment.
He further comments that before he was brought on board, Paramount had already had a script prepared (in fact, Dean Riesner had written a first draft screenplay for the film in late 1979), centering on the Vincent character, with a plot revolving around the "new kind of wiseguy" (in Coppola's words) of the '70s and '80s, and involving the lesser known drug cartels.
Coppola says that he felt The Godfather saga was essentially Michael's story, one about how "a good man becomes evil," as the writer/director puts it on the same commentary track referenced above. Coppola says he felt that Michael had not really "paid for his sins" committed in the second film, and wanted this final chapter to demonstrate that. In keeping with this theme, Coppola completely re-wrote the script; he also wanted to title the movie, "The Death of Michael Corleone," but Paramount balked.
Julia Roberts was originally cast as "Mary Corleone", but dropped out due to scheduling conflicts. Madonna wanted to play the role, but Coppola felt she was too old for the part. Sofia Coppola, the director's daughter, was given the role of Michael Corleone's daughter when Winona Ryder dropped out of the film at the last minute (supposedly due to illness). Her much-criticized performance resulted in her father being accused of nepotism, a charge Coppola bitterly refutes in the commentary track, asserting, in his opinion, that critics, "beginning with an article in Vanity Fair," were "using [my] daughter to attack me," something he finds ironic in light of the film's denouement when the Mary character pays the ultimate price for her father's sins.
As an infant, Sofia Coppola had played Michael Corleone's infant nephew in The Godfather, during the climactic baptism/murder montage at the end of that film. (Sofia Coppola also appeared in The Godfather, Part II, as a small immigrant child in the scene where the 9-year-old Vito Corleone arrives by steamer at Ellis Island.) Sofia also played a child who is killed in a drive-by shooting in her father's 1984 film The Cotton Club. The character of Michael's sister Connie is played by Francis Coppola's sister, Talia Shire. Other Coppola relatives with cameos in the film included his mother, father (who wrote and conducted much of the music in the film), uncle and granddaughter, Gia. Michele Russo, who plays the son of the assassin "Mosca," is also a distant Coppola relative, from the same town as Francis Coppola's great-grandmother. In addition, Coppola cast Catherine Scorsese, mother of Martin Scorsese, for a bit part.
Journalist David Yallop argues that Luciani was planning a reform of Vatican finances and that he died by poisoning; these claims are reflected in the film. Yallop also names as a suspect Archbishop Paul Marcinkus, who was the head of the Vatican bank, like the character Archbishop Gilday in the film. However, while Marcinkus was noted for his muscular physique and Chicago origins, Gilday is a mild Irishman.
The character of Frederick Keinszig, the Swiss banker who is murdered and left hanging under a bridge, mirrors the fate (and physical appearance) of Roberto Calvi, the Italian head of the Banco Ambrosiano who was found hanging under Blackfriars Bridge in London in 1982 (it was unclear until very recently whether it was a case of suicide or, as the Italian idiom has it, "being suicided." Courts in Italy have recently ruled the latter.) The name "Kleinszig" is taken from Manuela Kleinszig, the girl friend of Flavio Carbone who was indicted as one of Roberto Calvi's murderers in 2005.