In 1975 New York, after having served five years of a 30-year prison sentence, career criminal Carlito Brigante is freed on a legal technicality exploited by his close friend and lawyer, Dave Kleinfeld. Carlito vows to end his unlawful activities but is persuaded to accompany his young cousin Guajiro to a drug deal held at a bar. Guajiro is betrayed and killed by his suppliers and Carlito is forced to shoot his way out. Later, Carlito takes Guajiro's $30,000 from the botched deal and uses it to buy into a nightclub owned by a gambling addict named Saso with the intention of saving $75,000 to retire to the Caribbean.
As nightclub co-owner, Carlito declines several offers for a business partnership with a hot-headed young gangster from the Bronx named Benny Blanco. Carlito also rekindles his romance with his former girlfriend Gail, a ballet dancer who moonlights as a stripper. Kleinfeld develops a love interest with Benny's girlfriend, Steffie, a waitress at the club. Benny's frustration with Carlito's constant rejections boils over and he confronts Carlito one night at his table. Carlito publicly humiliates Benny, who reacts by manhandling Steffie. Fueled by his now-extensive use of alcohol and cocaine, Kleinfeld brazenly pulls out a gun and threatens to kill Benny, but Carlito intervenes. Despite being personally threatened by Benny himself, Carlito lets Benny go unharmed; a decision which alienates Carlito's bodyguard Pachanga.
Kleinfeld, who stole $1 million in payoff money from his client, Mafia boss Anthony Taglialucci, is coerced into providing his yacht to help Taglialucci break out of the Rikers Island prison barge. Kleinfeld begs for Carlito's assistance in the prison break, and Carlito reluctantly agrees. Under cover of night, Carlito, Kleinfeld, and Taglialucci's son, Frankie, sail to a floating buoy outside of the barge where Taglialucci is waiting. As they pull Taglialucci aboard, Kleinfeld kills him and Frankie and dumps their bodies in the East River. Carlito immediately severs his ties with Kleinfeld and decides to leave town with Gail. The next day, Kleinfeld barely survives a retaliatory assassination attempt at his office.
Carlito is apprehended by police and taken to the office of District Attorney Norwalk, where he is played a tape of Kleinfeld offering to testify to false criminal allegations against Carlito. Norwalk advises that he is aware that Carlito is an accomplice to the Taglialucci murders in an attempt to leverage him into betraying Kleinfeld, but Carlito refuses. Carlito visits Kleinfeld in the hospital, where Kleinfeld confesses to selling Carlito out. Having noticed a suspicious man dressed in a police uniform waiting in the lobby, Carlito secretly unloads Kleinfeld's revolver and leaves. The man is Taglialucci's other son, Vinnie, seeking vengeance for his brother and father. Vinnie sneaks into Kleinfeld's room and shoots him dead.
Carlito buys train tickets to Miami for himself and Gail, now pregnant. When he stops by his club to get the stashed money, Carlito is met by a group of East Harlem Italian gangsters led by Vinnie. The Italians plan on killing Carlito, but he manages to slip out through a secret exit. The Italians pursue him throughout the city's subway system and into Grand Central Terminal, where they engage in a gunfight. Carlito kills all of his pursuers except Vinnie, who is shot and killed by police. As Carlito runs to catch the train where Gail and Pachanga are waiting for him, he is ambushed by Benny, who shoots Carlito several times with a silenced gun. Pachanga admits to Carlito that he is now working for Benny, only to be shot dead by Benny as well. Carlito hands a tearful Gail the money and tells her to escape with their unborn child and start a new life. Carlito is wheeled away on a gurney to be taken to hospital. As he dies, Carlito stares at a billboard with a Caribbean beach and a picture of a woman. The billboard then comes to life in his mind, and the woman, now Gail, starts dancing.
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