The movie begins with Zohan Dvir (Adam Sandler), an Israeli Special Forces soldier, hanging around at the Tel Aviv beach, attracting several women and capturing the attention of every beach-goer with his Hacky Sack prowess including a clumsy Fizzy Bubelech drinker. Then the film goes to his vacation in Eilat where he cooks fish in the nude, using copious amounts of hummus for himself, his friend and several women. His party favor, catching the fish between the cheeks of his buttocks. As he finishes cooking, an Israeli Defence Forces helicopter arrives, stealing him away from his presumed well-earned vacation.
During a subsequent briefing, Zohan expresses his displeasure about having his vacation cut short. After being heckled by his officer, he eventually agrees to do yet another mission of recapturing a key Palestinian terrorist, the "Phantom" (John Turturro), who had been freed by the Israeli government in exchange for two captured Mossad agents, plus an additional "to-be-named-later" spy. Later, as Zohan expresses his desire to leave Israel and become a hairdresser in New York City, his wishes are met with derision and accusations of homosexuality by his mother and his father, who had fought in Israel's Six-Day War.
The disgruntled Zohan fakes his own death during the pursuit of the Phantom, who is tricked into believing he had killed Zohan. Zohan smuggles himself into a flight to New York City in a pet crate of two dogs named Scrappy and Coco. Changing his hairstyle into a 1987 Paul Mitchell's Avalon style and taking "Scrappy Coco" as a new alias, he sets out to pursue his dreams in New York City.
Initially unsuccessful in getting hired at an upscale Paul Mitchell salon (as well as an African American salon and a children's salon), Zohan's military expertise earns him a new friend, Michael (Nick Swardson), who gives him a place to stay, though Michael feels uncomfortable with Zohan's sexual activities with Michael's mother, Gail (Lainie Kazan). Zohan's passion for disco (Discothèques) runs him into a fellow Israeli named Oori (Ido Mosseri), a Zohan fan who is aware of Scrappy Coco's true identity but agrees to keep it a secret. Oori introduces him to a block in lower Manhattan filled with Middle Eastern Americans, who are split between a Palestinian side and an Israeli side of the street.
Zohan attempts to land a job in a struggling salon of a Palestinian woman named Dalia (Emmanuelle Chriqui). After first only allowing the ostentatious Zohan to sweep floors for free, she eventually allows him to be a stylist after he pleases a senior lady with a satisfactory haircut and back room sexual service. Zohan's reputation spreads instantly among the elder women of lower Manhattan, who comment that "besides the sex, he gives a pretty good haircut." As his popularity zooms, Paul Mitchell even calls him, begging him to take a job, which is met with blunt refusal. Dalia's business booms, upsetting Walbridge (Michael Buffer), a corporate magnate who has been trying to force out all the local tenants on the block so that he may build a huge mall.
Eventually Zohan is identified by a Palestinian cab driver named Salim (Rob Schneider), whose goat Zohan had stolen after Salim threw his shoe at Zohan and spat in his face. Salim convinces his friends to help him exact revenge on Zohan. He rebuffs their advice to "let the professionals" take care of it because Salim wants the glory of killing Zohan for himself. He and his friends decide to build a bomb, but they are unsure how to do so. Thinking that they need "chemicals," Salim and his friends walk into a pharmacy and try to ask for liquid nitrogen. Hearing Salim's mispronunciation, the pharmacist instead presents Salim with Neosporin. Seeing that the Neosporin doesn't destroy Zohan's workplace, Salim reluctantly informs Phantom through a Hezbollah hotline. Now a successful fastfood chain owner, Phantom then pays a visit to New York to hunt Zohan down.
Meanwhile, Zohan realizes that he has fallen in love with Dalia when he discovers that he has unexplainable erectile dysfunction except in her presence. However, Dalia rejects Zohan's feelings for her after he reveals he was formerly an Israeli counter-terrorist operative. Zohan decides to leave Dalia and confront the Phantom in a championship Hacky Sack game sponsored by Walbridge. His fight is cut short with sudden news of the Middle Eastern block being attacked and fires breaking out.
Zohan arrives and calms the Israelis and Palestinians, who each blame the other for the violence and fires. The Phantom then appears and confronts Zohan, but he refuses to fight and eventually convinces the Phantom to cooperate with him against the arsonists. As Zohan and Phantom work to save the block, Dalia appears, revealing that she is the Phantom's sister – or "Fatoush" as she calls him. Zohan's personal dossier technology allows him to discover the arsonists' true identities as white racist rednecks. The arsonists have been hired by Walbridge to instigate an inter-ethnic riot between the Israelis and Palestinians and hopefully allow him to take over their stores more easily. Zohan and Phantom lead the united Israelis and Palestinians of the block to save their shops, defeating the rednecks, thwarting Walbridge's plans, but damaging all of the shops on the block and destroying Dalia's salon, as well as Walbridge's girlfriend's breast implants, by using the "Sonic Power" which is a combination of stereotypical Arabic rhythmic calling and stereotypical Hebrew "chhhh" sounds. The police arrive to arrest Walbridge for his crimes.
With the Israelis and the Palestinians united, the block is transformed into a collectively-owned mall called the Peace and Brotherhood Fire Insurance Mall, in which Zohan and Dalia realize their dream, opening a joint beauty parlor. The Phantom also fulfills his lifelong passion of opening up a shoe store. The movie ends happily as Zohan's parents approve of his new wife (Dalia) and hair salon, called "Dalohan," becoming customers themselves in a surprise visit.