Gears of War 2 takes place six months after the detonation of the Lightmass Bomb at the end of the first game. Though most of the underground army of the Locust Horde was destroyed, the explosion also caused much of the liquid Imulsion underground to vaporize, causing a fatal disease called Rustlung to spread among the diminished human population. After months of peace, the cities of Tollen and Montevado suddenly and mysteriously disappear underground, leading the Coalition of Ordered Governments (COG) to suspect the resurgence of the Locust. Soon after, the once impenetrable Jacinto, one of the last remaining safe havens for humans, begins to show signs that the same fate awaits it. In order to stop the fall of Jacinto, the COG responds with a large-scale counter-offensive against the Locust. Senior Producer Rod Fergusson says "In order to save Jacinto, [the COG] have no choice but to take the war to the Locust."
Returning characters includes the main protagonists of the series Marcus Fenix and Dominic Santiago and others from the first game, including Marcus and Dominic's fellow Delta Squad COG soldiers, Augustus Cole and Damon Baird. Also returning in supporting roles are radio dispatcher Anya Stroud and senior officer Colonel Hoffman. Lead designer Cliff Bleszinski confirmed that the character Carmine would be returning, but did not reveal how or in what capacity as Carmine was killed in the original Gears of War. It was later revealed that the original Anthony Carmine would not be present in the Gears of War 2 campaign, but rather his brother, Benjamin, would make an appearance. The game also introduces several new characters. They include Chairman Prescott, the near dictatorial military leader of COG; Tai Kaliso, "a spiritual and meditative warrior from a tradition of honor bound fighters;" and Dizzy Wallin, a former Stranded who joined the COG in order to keep his family safe. Dominic's wife Maria also makes an appearance, and Dominic's search for her plays an important part in the story.
With the COG army continuing to lose large numbers to Locust raids, the COG plan a counter-attack against the Locust by sending troops in Grindlifts deep below the surface to attack the home of the Locust, the Hollow. Though they suffer losses due to the leader of the Kantus monks, Skorge, the human forces continue their plan. After their descent, Delta squad, consisting of Marcus Fenix, Dom Santiago and Benjamin Carmine, later joined by Augustus Cole, begin to search the Hollow and discover that the Locust are taking prisoners, as they managed to save Damon Baird from imprisonment. Delta squad finds another imprisoned squad member, Tai Kaliso, who has suffered wounds inflicted by the Locust while torturing him. Though Marcus tries to arm Tai for a fight, Tai instead commits suicide, the physical and emotional trauma too much for him to bear. Delta squad continues to search the Hollow and discovers that the Locust are using a giant Riftworm to eat away at the rock structures at the outskirts of Jacinto in hopes of sinking it into the ground. They try to evacuate, but are swallowed by the Riftworm. The squad manages to kill the worm from the inside, but Carmine is killed by parasites.
Delta squad manages to escape to the surface only to be given orders to investigate a nearby abandoned COG outpost where they encounter experimented creatures and learn of a back door entrance to the Hollow in the nearby Kadar Mountains. The team fights its way to the caverns in a Centaur tank and discovers that some Stranded have taken shelter near the entrance. Marcus orders Cole and Baird to evacuate the Stranded while he and Dominic search further. They find more prisoner cages and Dominic convinces Marcus to help him seek his wife. They manage to find her, but the Locust torture has left her too traumatized and unable to communicate, so Dominic chooses to euthanize her. Marcus and Dominic continue their assault on Nexus, the Locust capital, and are soon joined by more COG forces from the surface, including Cole and Baird. They discover that the Locust have messages from Adam Fenix, Marcus' father, that suggests an alternate way of ending the war, in case they can't take out the queen; to sink Jacinto in order to let water flood the Hollow and wipe out the Locust. They learn from the Locust queen herself that she is pursuing the same plan not only to wipe out the humans, but to also destroy lambent Locust that have been exposed to Imulsion and are attempting to overthrow the queen. Marcus realizes that humans must sink Jacinto first, before the Locust mobilize and escape to the surface.
Delta squad escapes the Hollow on a pair of Reavers, defeating Skorge and his Hydra, and then return to Jacinto where a mass evacuation is underway. The COG have decided that they can sink Jacinto using a Lightmass bomb and Delta squad is ordered to clear debris out of the way in the main sink hole, allowing a helicopter to safely transport the bomb into the caverns. Marcus orders Cole and Baird to assist with the bomb, while he and Dom manage to kill a Brumak driver, hijack the Brumak, and use it to arrive at the Hollow and fulfill their objective. As the helicopters arrive, the Brumak, exposed to high levels of Imulsion, begins to mutate. As it changes, it attacks the helicopter transporting the bomb, which falls into the Imulsion. With the Lightmass bomb lost, Marcus comes up with a plan that includes killing the lambent Brumak as a replacement for the bomb. He uses the Hammer of Dawn to kill the Brumak, which explodes, taking out the last supporting structures of Jacinto which sink it, flooding the Hollow with water. As the COG forces and civilians evacuate, a voiceover of the Locust queen talks about unintended legacies.