Two years have passed since Banjo and Kazooie defeated the witch Gruntilda and buried her alive under a boulder. While the two are playing poker with their friends Mumbo Jumbo and Bottles, Gruntilda's sisters Mingella and Blobbelda arrive in a large digging machine, the Hag 1. They destroy the boulder and free Gruntilda, her time spent underground having rotted her flesh away and reduced her to a skeleton. Seeking revenge, Gruntilda destroys Banjo's house before fleeing with her sisters. Banjo, Kazooie and Mumbo all escape in time while Bottles is caught in the magical blast and killed. The three remaining friends decide to put an end to the witch's plans.

Following the witchs' trail, Banjo and Kazooie arrive at Jingo Village in the Isle o' Hags, where King Jingaling, king of the Jinjos, explains that his subjects were frightened away by the Hag 1 and scattered throughout the island, and gives the two their first Jiggy to help find them. Meanwhile, Gruntilda's sisters introduce her a cannon called the Big-O-Blaster (B.O.B.) that will restore her body by sucking the life force from any given target. They test B.O.B. on King Jingaling, who is turned into a zombie. Gruntilda plans to charge B.O.B. long enough to blast the entire island. The witch's most loyal minion Klungo is sent out to hinder Banjo and Kazooie in their progress by fighting them. After taking many beatings from Gruntilda as punishment for losing, Klungo eventually gives up and abandons her.

Finally reaching Gruntilda's fortress at Cauldron Keep, Banjo and Kazooie confront Gruntilda and her sisters in another trivia game in which the losers will be flattened under one-ton weights. The two dispatch Mingella and Blobbelda while Gruntilda escapes once more. They then reverse the effects of B.O.B., bringing both King Jingaling and Bottles back to life. The two confront Gruntilda in the Hag 1, which explodes in the end and destroys most of Gruntilda's body, leaving her nothing more than a talking skull. Banjo and Kazooie return to Bottles' house with their friends to find that everyone else has celebrated without them. They decide to play kickball with Gruntilda's head, who swears to have her revenge...

Banjo-Tooie is currently scheduled to launch on Xbox Live Arcade in April 2009.