Liz Pennykettle is a descendant of Guinevere, a human friend of Gawain, the last dragon on earth. Liz makes small clay dragons that come to life, and her 11-year-old daughter, Lucy, is also skilled at making magical dragons. They receive a letter from David Rain, their college-aged tenant who is on an academic mission to the Arctic. He and his girlfriend, Zanna, are at a polar research station in Chamberlain, Canada, and both are concerned about their dragons at the Pennykettle house.
David’s inspiration dragon, Gadzooks, has stopped sending him subliminal messages about what kind of fiction he should write. Zanna is concerned about her potion-making dragon, Gretel, who has a sordid past because she once belonged to the evil sibyl Gwilanna. Without Zanna’s knowledge, Liz keeps Gretel imprisoned in a cage because she thinks Gretel is dangerous.
A polar bear named Ingavar makes a bargain with Gwilanna to save his life after he is attacked by hunters. In exchange for healing his wounds, Gwilanna, in the form of a raven, demands that Ingavar travel to the town of Chamberlain, Canada. He is supposed to find David Rain in Chamberlain and steal David’s mystic relic, a powerful polar bear fang. On his journey, Ingavar is joined by a strange elderly polar bear named Thoran, who is fond of speaking in riddles. Thoran says he’s navigating by following a pulsing star in the sky, the fire star.
At the Chamberlain research base, David uses his free time to write about Ingavar and Thoran’s journey toward him, assuming he’s just writing for fun when he’s really writing about reality as it unfolds. He and Zanna are sent into town to get supplies from the trading outpost.
An invisible clay dragon named Groyne sneaks into the Pennykettle house and secretly gives Gretel a white flower and a drop of Zanna’s blood to free her. Gretel escapes her cage, starts a small fire and gets into a fight with David’s dragons Gadzooks and G’reth before Liz and Lucy arrive to stop the fight. After the scuffle, G’reth, who is the wishing dragon, appears to be under the influence of magic. Then he suddenly disappears. Liz says that because G’reth is a wishing dragon, he can move through time and space.
At the trading outpost, when David and Zanna go outside, Ingavar attacks them. They escape unscathed, Ingavar is shot with tranquilizer darts, and the absent professor Dr. Bergstrom arrives at the polar research base to reprimand them for their careless behavior. Zanna is angry at David for not sharing all his knowledge about Gwilanna’s connection to Ingavar, so she breaks up with him.
Gwilanna appears to Lucy and tells her that a fire star has appeared in the sky, signaling an era where dragons will rise again. She kidnaps Lucy and takes her through time and space. David returns to Liz's home in Massachusetts.
Zanna visits the unconscious bear Ingavar and puts the tooth of Ragnar, which she got from her Inuit acquaintance Tootega, who stole it from David, inside Ingavar’s mouth. Ingavar revives. Three polar bears that walk upright kidnap Zanna, and they all disappear into the Arctic.
At the Pennykettle house, Liz encourages David to make his own clay dragon, despite having no experience. He sculpts a blue dragon, which he names Gollygosh. It is a healing dragon. Gollygosh can fix malfunctioning objects and heal living creatures.
Lucy and Gwilanna spend several days in a cave in the Arctic near Gawain’s burial place, on an island called the Tooth of Ragnar. Gwilanna is waiting for the fire star to come closer to earth so she can use Lucy to bring Gawain back to life.
Tootega finds Zanna waiting in his village after he goes there for a visit. The polar bears that kidnapped Zanna left her in the Inuit village to recover from the cold. She has been learning magic from Tootega’s grandfather, who is a shaman.
Gwilanna leaves Lucy alone in the cave, and a spirit bear comes to meet Lucy. The bear transforms into Gaia, the earth goddess, who has brought G’reth the wishing dragon and Groyne the white dragon with her. They perform a ritual that Gaia says will protect Lucy, whose formerly blond hair has suddenly turned red like her ancestor Guinevere. When Gaia and the dragons leave, Lucy falls asleep and an elderly female polar bear arrives to protect her. They both hibernate for the next three months.
Dr. Bergstrom asks David to help him defeat Gwilanna, because Gwilanna wants to raise Gawain to life, and Gawain’s existence will draw other dragons from unknown parts of the universe. The combined fire of the dragons will heat up the earth, and the polar ice caps will melt. Dr. Bergstrom says a transdimensional race called the Fain once used earth as a hatching place for dragons. He says Gwilanna is one of these transdimensional Fain aliens, attached to a human body.
Liz tells David about Arthur, the love of her life who disappeared when she kindled Lucy. Lucy was born not as the result of a physical human relationship but a complicated magical ritual, and Arthur ran away from Liz when he saw her holding baby Lucy.
Months pass. In February, a few days before Gwilanna is scheduled to try to raise Gawain, a Fain alien contacts David’s consciousness. The Fain says that David is somehow linked to Arthur, and back in reality David receives a letter containing only the words Farlowe Island.
On Farlowe Island, Arthur has enjoyed the life of a monk, but has also spent the last few months writing the same stories David has. He also has the claw of Gawain, an artifact that needs to be returned to Gawain’s bones if Gawain is going to be resurrected or put to rest forever. Grockle, a real baby dragon, not a clay dragon, flies to Arthur to retrieve the claw, but is imprisoned by Arthur’s fellow monks who think Grockle is a monster.
Gwilanna, in raven form, is frozen to death by an evil Fain alien. At the Pennykettle house, the evil Fain possesses the body of Liz’s neighbor Henry, then travels to Farlowe Island where the Fain jumps out of Henry’s body and possesses a monk. The Fain wants to kill Grockle, but Grockle escapes and flies free. David arrives at Farlowe Island and fights with the evil Fain, who eventually runs away.
Zanna and Tootega come to the Arctic island called the Tooth of Ragnar. Grockle flies to the island, also. The evil Fain possesses Ingavar and makes him magically stomp the island, cracking it and causing it to sink into the ocean. Lucy and the female bear who guards her wake up from their hibernation and escape just as their cave collapses. Grockle watches the island sink into the ocean and firebreathes on Ingavar until Ingavar’s body is vaporized. The Fain leaves Ingavar and possesses a Tootega, who aims his gun at Grockle with the intention of killing him. Grockle flies through a transdimensional portal to safety.
The polar bear rescues Lucy and swims with her to Zanna, who is on a safe part of the collapsing island. David teleports to the Tooth of Ragnar by using the magic properties of the bear tooth he carries. The Fain in Tootega’s body throws ice spears at David. Since the ice of the island contains the essence of Gawain, the ice makes David stronger as it pierces him, and he calls the dead spirit of Ingavar back to life to spiritually destroy the Fain possessing Tootega, killing Tootega’s body in the process.
Zanna rushes to the wounded David, and they reconcile. David dies, and the polar bears stomp the ice until David’s and Ingavar’s bodies sink beneath the water.
A few days later, a monk called Brother Bernard goes to visit Liz and Lucy Pennykettle in their home. Bernard says Arthur wants to visit Liz, but that he’s been nearly blinded by his struggle with the evil Fain.
A few weeks later, Liz, Lucy, Arthur and Zanna go to the local library gardens to release Snigger, their squirrel friend, into the wild. Zanna reveals that she’s pregnant with David’s child.