The film stars Mel Gibson as Guy Hamilton, an Australian journalist, Sigourney Weaver as Jill Bryant, a British Embassy officer. It also stars Linda Hunt as the male dwarf Billy Kwan, Gibson's local photographer contact, a role for which she won an Academy Award for Best Supporting Actress. The film was shot in both Australia and the Philippines and includes Australian actors Bill Kerr as Colonel Henderson and Noel Ferrier as Wally O'Sullivan.
It was banned from being shown in Indonesia until 1999. The title The Year of Living Dangerously is a quote which refers to a famous Italian phrase used by Sukarno; vivere pericoloso, meaning "living dangerously". Sukarno borrowed the line for the title of his National Day speech of August 17, 1964.
Guy is initially unsuccessful because his predecessor, tired of life in Indonesia, had departed without introducing Hamilton to his contacts, and Guy receives only limited sympathy from the journalist community, which competes for scraps of information from Sukarno's government, the (Communist) PKI and the conservative Muslim military. However, Billy Kwan takes a liking to Guy and gets him interviews.
Billy introduces Guy to Jill Bryant, a beautiful young assistant at the British embassy. Billy and Jill are close friends, and Billy subtly manipulates Guy and Jill's encounters and, after initially resisting Guy because she's returning to the UK, Jill falls in love with an equally smitten Guy. This scandalous news is subsequently all over the foreigners' community.
Jill discovers that the Communist Chinese are arming the PKI and passes this information to Guy to save his life, but Guy wants to cover the Communist rebellion that will occur when the arms shipment reaches Jakarta. Billy and Jill are shocked by this and withdraw their friendship, leaving Guy with the American journalist Pete Curtis, and Guy's assistant, who is secretly PKI.
Guy is quietly shanghaied by his assistant Kumar, and driver to keep him from harm and protect the information. Upon returning to Jakarta, Guy plumbs the depths with Curtis but then realizes his folly.
Billy, outraged by Sukarno's failure to meet the needs of most Indonesians including a woman he's helped who has lost her child, decides to hang an illegal sign from the Western hotel but is thrown from the window by security men, and dies in Guy's arms. His death is also witnessed by Jill.
Guy, who is still in search of "the big story" then visits the Presidential palace in search of a story after the Muslim generals, who have learned of the Communist shipment, have taken over and unleashed executions. Guy is viciously struck down by an Army officer, detaching his retina.
Resting alone in Billy's bungalow, Guy recalls a passage from the Bhagavad Gita ("all is clouded by desire") that Billy told him. Kumar visits him and brings him up to date on the coup attempt. Risking permanent damage to his eye, he implores Kumar to drive him to the airport, and Guy boards the last plane out of Jakarta and is reunited with Jill.
Mel Gibson described his character Guy, saying, “He's not a silver-tongued devil. He's kind of immature and he has some rough edges and I guess you could say the same for me.”