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Just prior to World War II, at Australia’s Sydney Harbor, Commander Jeffrey Napier of the British Navy visits old family friend, Karl Ehrlich, the German captain of the decrepit freighter Ergenstrasse.  Although he lost his German Navy commission for refusing to support Nazism, Karl remains loyal to his homeland and shows Jeff an Imperial German flag he still keeps in a drawer.  Because the Nazis have just invaded Poland and war seems imminent, Jeff informs Karl that the British are interning the Ergenstrasse.  Jeff then introduces Karl to his fiancée, Elsa Keller, unaware that they are already acquainted.  When Karl is alone with Elsa, he warns her to leave Jeff alone or he will tell Jeff about the men she has destroyed in the past.  She leaves Jeff, vowing to get even with Karl.

Later, despite a shortage of fuel and provisions, Karl is determined to elude the British and return the Ergenstrasse to Germany.  As Karl prepares to leave, the German Consul-General reveals that Elsa is a secret agent and orders him to take her with him.  After slipping his boat out of the harbor during a fog, Karl sails south to elude the British.  His relationship with Elsa remains icy, but his first mate, Kirchner, is attracted to her and tries to impress her with his Nazi party connections.  At Auckland Island, the site of an international shipwreck station, Karl sends Kirchner ashore for supplies.  After taking provisions from three Scottish fisherman marooned there, Kirchner kills them in cold blood, but reports to Karl that he left them in good condition.

Afterward, the crew reports that they are running short of coal, prompting Karl to order that all wooden items on board be burned for fuel.  Still low on wood, Karl orders that the lifeboats be split and burned.  When several crewmen, among them Schleiter, balk at destroying their means of survival if the ship goes down, Karl begins to chop the boats himself.  The British ship Rockhampton, on which Jeff serves as executive officer, is sent to pursue the Ergenstrasse and Jeff’s knowledge of Karl helps them focus their search.  They discover the murders at Auckland Island and Jeff, believing that Karl is responsible, feels hatred toward his former friend.  Karl anchors off the islands of Pom Pom Galli, where he drives the crew hard to gather food and fuel.  Realizing that the cook’s mate, Max Heinz, suffers a weak heart, Karl assigns him the easier task of lookout.

Disaster strikes when one of the men, Winkler, is injured while chopping wood and another, Cadet Walter Stemme, is attacked by a shark and lies dying of gangrene.  Aware that the Rockhampton is near, Karl considers calling the doctor on board for help, but, knowing that medical attention cannot save Stemme and the crew would be arrested as war criminals, he decides against it.  One crewman accuses Karl of “playing God,” and Stemme, who overhears their conversation, kills himself to prevent risking the lives of his mates.  Instead of burying Stemme at sea, Karl leaves the injured Winkler and sickly Max on the island to bury him, knowing that they will be found and treated by the doctor aboard the Rockhampton.

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Elsa comes to appreciate Karl's integrity and strong convictions, and shares with him her struggle for survival after the suicide of her father.  As they begin to care for each other, she takes a personal interest in the crewmen’s welfare.  When Karl hears radio reports about the Auckland Island murders, he orders Kirchner to write and sign a confession in the captain's log book, which he plans to use as evidence for Kirchner's court-martial when they land in Germany.  After being rescued, Max and Winkler report to Jeff’s captain that the Ergenstrasse sank after an onboard explosion.  Unconvinced, Jeff and his captain continue their pursuit.

When the Ergenstrasse arrives at the neutral port of Valparaiso, Karl is greeted by newsmen and photographers, who report his story as a daring escape by a Nazi hero.  After the Nazis claim that the report of the murders is a British fabrication, Jeff demands that Karl issue a public retraction.  Ordered by his superiors to conceal the truth, Karl replies that the truth is in his logbook, then mourns the sacrifice of his personal honor.  Elsa guesses what happened and confronts Kirchner, who remains unapologetic.  After the Rockhampton is assigned to a more important mission, Jeff, feeling personally obliged to bring Karl to justice, asks to be transferred to a patrol boat in the North Sea, through which the Ergenstrasse must pass to reach Germany.

After his ship has been refitted and refueled, Karl prepares for the remainder of his journey, expecting that most of his crew will choose to stay in Valparaiso.  To his surprise, every man returns aboard, including Schleiter, whom he has grown to respect and who sheepishly reveals a slogan tattood on his back by pranksters when he was passed out from drinking that reads, “Britannia rules the waves.” Elsa, who has been ordered to remain in Valparaiso, begs Karl to remain with her.  Although he admits he loves her, Karl feels he must try to bring the ship home.  Before the ship leaves, Elsa joins him onboard.

Later, off the coast of the Netherlands, the Ergenstrasse encounters a violent storm.  As Jeff’s patrol boat closes in, Karl forces Kirchner to remain aboard with him, then orders Elsa and the crew into lifeboats, and gives them the logbook to deliver to Jeff.  After Karl sets the freighter at full throttle toward the patrol boat, he discovers that Elsa is still with him.  When a shell from the patrol boat explodes the freighter’s boiler, Karl and Elsa raise the Imperial German flag, then board the last lifeboat.  Although the freighter sinks, its crew is rescued by the patrol boat.  From Karl's logbook, Jeff learns that his friend is innocent of the murders and initiates a search for him, but Karl and Elsa are never seen again.