Private detective Katrielle Layton, daughter of the famous Professor Hershel Layton, awakens from a nightmare about her missing father, on the day of her detective agency's opening. The same day Katrielle and her assistant Ernest Greeves meet a talking dog that, for reasons unknown, cannot be understood by anyone else but them. The dog explains that he has amnesia, and that he wishes for them to solve the mystery of who he really is, and Katrielle creates the name Sherl O.C Kholmes for him.
After solving the case of the disappearance of one of Big Ben's hour hands at the request of Inspector Hastings of Scotland Yard, Katrielle, Ernest and Sherl investigate and solve several other cases, most of them related to the "Seven Dragons", seven of the most rich and influential figures of London, with assistance of Hastings and Emiliana Perfetti, one of the Yard's profilers. Other cases include Hastings' request to look for a present to his wife on a holiday and solve a murder that Katrielle was wrongly accused of committing. In one occasion, Ernest also tells Sherl the story of how he and Katrielle met, when he was falsely accused of theft and she helped clear his name as well.
In the final case of the game, Layton and the Seven Dragons are invited by the mysterious Lord Adamas to the abandoned mansion of Maximilian Richmond, a millionaire who died 10 years before. In the occasion, Adamas forces the Seven Dragons to sign a contract where they relinquish all their fortunes to him should they fail to solve a series of puzzles, or he will reveal a grave secret about them. Attending the event at Layton's stead, Katrielle accepts Adamas' request to oversee the dispute. All of the Dragons fail to solve the puzzles and accept defeat, until Katrielle discovers that Lord Adamas is no other than Ernest, whose true identity is Miles Richmond, Maximilian's grandson, who grew up with the false assumption that the Dragons betrayed and ruined their family, swearing to enact revenge on them.
After the misunderstanding is cleared, Ernest reconciles with the Dragons and accepts Katrielle's request to keep working as her assistant. In the post-credits, Katrielle renews her vow to unlock the mystery of Sherl's true identity and discover the whereabouts of her father. Although she is no closer with the latter, she proclaims that she has solved the puzzle that her father left behind when he disappeared: "If you're not really my child, then who exactly are you?".