A German nobleman named Wolfgang Krauser tracks down his half-brother, Geese Howard, who has isolated himself in the mountains while recovering after his previous defeat. Krauser learns the name of the man who defeated Geese, Terry Bogard, and decides to challenge him to prove his superiority. Elsewhere, Terry meets up with a young boy named Tony who asks to be his disciple, but Terry refuses. After a sparring match with Kim Kaphwan, Terry is found by Krauser and fights him, but loses due to an injury from his battle with Kim. Krauser tells him to recover and meet him in Germany at Stroheim Castle for a rematch.

Terry wakes up in Tony's home and learns that he was taken care of by Tony's mother, Elza, who does not want Tony to emulate Terry's violent activities and demands that he leave. Later, Tony notices Terry at the train station and asks him to stay, but Terry refuses and forbids Tony to follow him, though Tony does so anyway without his knowledge. Tony attempts to help Terry prepare for his next fight with Krauser, but Terry believes he cannot win and falls into a deep depression, developing a drinking problem.

In Japan, Mai Shiranui visits the dojo where Jubei Yamada and Andy Bogard are training, wanting to see Andy. Joe Higashi also arrives to inform Andy of Terry's defeat. Later that night, Jubei informs Andy and Joe of Krauser's origins as the "Emperor of Darkness" and heir of the powerful Stroheim family, having scarred Geese and killed his own father as a teenager. Jubei warns them not to get involved, but Andy refuses and leaves with Joe to seek revenge. Jubei asks Mai, who had been eavesdropping, to accompany them.

Terry is later arrested for assault after beating up some street punks who attempted to rob him. Joe posts Terry's bail, but is ashamed to see him in his state and leaves him to his own devices. Tony remains determined to help Terry out of his drunken depression. In Germany, Andy and Mai try to find Krauser, but learn that he is out of the country. Mai is attacked by Laurence Blood, Krauser's right-hand man, who takes her captive to prevent them from finding Krauser, but she is rescued by Andy.

At a bar, Terry is challenged by Axel Hawk, but Tony ends up fighting Hawk's sparring partner, refusing to give up, despite being badly beaten. Seeing Tony's determination inspires Terry, who regains his confidence and defeats Hawk. Ready to challenge Krauser again, Terry learns that Joe challenged Krauser to get revenge for him, only to lose and be brutally injured with several broken bones. Visiting him at the hospital, Terry learns from Joe and Mai that Andy is waiting for him by their father's grave. There, Andy challenges Terry for the right to fight Krauser, with Terry emerging victorious thanks to a new technique, the Power Geyser.

The next day, Terry challenges Krauser at Stroheim Castle. After a fierce battle, Terry narrowly defeats Krauser, who congratulates Terry and throws himself from a damaged wall to his death. Geese learns of Krauser's defeat and begins plotting his own return. Later, Terry reunites Tony with his mother. Tony promises he will become a great martial artist like Terry someday, and Terry gifts him his cap before departing.

• Fatal Fury 2: The New Battle (anime) at Anime News Network's encyclopedia
• Fatal Fury 2: The New Battle at IMDb