The story starts off in a New York setting sometime after the first movie, presumably 1886 or later, and has Fievel recalling a strange dream in which he and his family went west. (Which many think retconned the previous film and TV series out of existence, though both this film and An American Tail: The Mystery of the Night Monster actually take place before An American Tail: Fievel Goes West and the TV series, which can be proven by the younger appearance of Fievel, Tanya and Yasha. Perhaps Fievel's dream of going west was a foreshadowing instead of a retcon.) Fievel and Tony discover that an ancient treasure lies underneath Manhattan when snooping around an abandoned subway (the Beach Pneumatic Transit system) and stumbling upon the remains of a dead mouse clutching a treasure map, and they decide must find it with the help of an archaeologist Tony knows Dr. Dithering, along with fighting five villains as well.
The movie focuses on the relationship between the over exploited workers of a sweatshop (in this case a cheese production line) and the factory's rich owners (Mr. Grasping - played by Ron Perlman, Toplofty - played by Tony Jay, and O'Bloat - played by Richard Karron) here the villains. It also focuses on the plight of the Native Americans in the United States.
The treasure under Manhattan turns out to be a group of Native American mice living a long distance beneath the surface (far below the sewers and an underground pressurized train) that decided to hide when they saw how the first Europeans only brought war and disease with them, and didn't want to wait for the European mice to do the same to them. An emotional scene ensues when Fievel must struggle with how cruel his own people the Europeans were (and still are at the time the film takes place) to the natives of America.
The sachem decides to send his daughter, Cholena to the surface to see if they have "changed their ways". Upon their return, Stuttlebutt (one of the members of the expedition to find the treasure) reports to the villains unbeknownst to the rest of the members of the expedition, who then decide to use this to their advantage. They tell all the workers of the sweatshop about Cholena (obviously not by name) and that she is their enemy.
The mouse NYPD (Chief McBrusque - played by Sherman Howard, and McBrusque's henchman / Dr. Dithering's associate Scuttlebutt - played by John Kassir), who also report to the villains, engage in a bout of police brutality, burning down "every mouse house and rat hole" until they find her. After what basically degenerates into a street riot as the worker mice try to capture Cholena and anyone else involved with her, Fievel and his friends decide to take Cholena back underground, but the police find out and go after them. Upon returning Cholena to her home and telling the chief what is happening, he gives them a bomb for them to collapse the tunnel connecting the Native Americans to the outside world. This floods it, together with the evil McBrusque and Scuttlebutt.
The movie ends with Fievel's papa forming a worker's union, and the villains agreeing amongst themselves to negotiate "with that riff-raff" because otherwise they'll go on strike and make them go background; while Tiger the cat, now the new police chief, watches them.
The second-last take shows Fievel seeing, through a foldable telescope, Cholena and her father disappearing into a hidden door at the foot of a statue. The last take being simply Fievel smiling as we fade to black.
In the film, Fievel mentions a dream he had in which he was a "famous gunslinger" in the Old West. Although, chronologically, the film is set before An American Tail: Fievel Goes West, it is believed to be a set up for the next film. However, the film's opening titles state the film as An American Tail III which can also lead an audience to believe that Fievel Goes West was the dream Fievel had. But in Fievel Goes West he becomes neither famous nor a gunslinger. There is conflict over whether or not the direct to video movies are even canon themselves, depending on whether they can be regarded as sequels or spinoffs.
"We Live in Manhattan" Written by William Anderson
"Friends of the Working Mouse" Written by William Anderson