A major aspect of the gameplay in Lyra's levels involves the shape-shifting ability of Pan, who can transform into four different forms; Ermine, Sloth, Hawk and Wildcat, with each form having its own unique ability. The Ermine's ability is "Insight", which allows Lyra to discover information about her surroundings, find hotspots, and reveal secrets. The Sloth's ability is "Whip", which allows Lyra to swing from poles and reach areas she cannot jump to. The Hawk's ability is "Glide", which allows Lyra to glide a short distance, covering gaps she wouldn't be able to get across any other way. The Wildcat's ability is "Climb", which allows Lyra to climb certain surfaces to reach otherwise inaccessible areas. Players often have to shift form mid-move. For example, to reach a certain platform, the player may need to use the "Whip" ability to have Lyra swing on a pole. After releasing her from the pole, the player may then need to immediately use the "Glide" ability to reach the platform, necessitating a form change whilst Lyra is in midair.
Also important in Lyra's levels are Evasion and Deception minigames. Evasion games occur whenever Lyra is spotted by an enemy, and involves pressing buttons to correspond with icons on screen to allow Lyra escape from her pursuer. Deception games are more common. These games take place whenever Lyra is involved in a conversation with someone and is attempting to deceive them. The better the player performs in the minigame, the more successful Lyra is in her deception. The minigames include, but are not limited to, matching symbols, collecting falling icons, avoiding falling icons, a Whac-A-Mole type game and a snooker type game.
Another major aspect of the gameplay is the alethiometer, (a rare truth-telling device which features in the novels). Once the player has access to the Alethiometer, it can be asked certain set questions. The device has thirty-six symbols on its outer edge, each with three meanings. These meanings are discovered over the course of game; some are learned automatically as the plot advances, others must be sought out by the player and can be missed. For each question, Lyra is given three words, and each word is assigned a hand on the Alethiometer. If Lyra knows the corresponding symbol of a given word, the hand automatically turns to the correct symbol. Words she doesn't know must be guessed by the player. When the three hands are all pointing at symbols, the player confirms the selection and Lyra asks the question. A balancing minigame then begins, where the player must press buttons corresponding to the on-screen display. The more symbols which were correctly identified in the first part of the game, the easier the balancing game is. If the player successfully completes the balancing game, the Alethiometer will answer the question.
The game begins with Lyra Belacqua, the Panserbjørne Iorek Byrnison and Lyra's dæmon Pan in an icy landscape being pursued by wolves. Iorek defeats the wolves and they head to a nearby Samoyed camp where they rescue a boy.
The game then returns to two months previously, with Lyra and Pan in her room in Jordan College discussing the immanent return of her uncle, Lord Asriel. She meets her friend and fellow student Roger Parslow, and decides to get into the Master's Retiring Room so she can watch Asriel's presentation. She hides in a wardrobe and sees Asriel present a picture from his travels in Svalbard showing "Dust" falling from the sky. Asriel subsequently finds her and tells her he is leaving on a difficult journey.
Meanwhile, Lyra meets Marisa Coulter and, before leaving Jordan, is given an Alethiometer by the Master who tells her Coulter must not know about it. Whilst exploring Coulter's apartment, Lyra finds a document with the names of numerous children, including Roger's, and the letterhead of the "General Oblation Board," and she realizes that Coulter is the leader of the Board; an organization that abducts children, supposedly to prevent them turning into "bad" adults. Lyra and Pan flee.
Coulter sends men to get Lyra and Pan back, but they are saved by Gyptians, and begin living on their ship, the Noorderlicht. Lyra learns how to use the Alethiometer more proficiently than any adult, and is visited by the witch queen Serafina Pekkala who tells her where the General Oblation Board has taken the missing children. The next day, the Noorderlicht docks at Trollesund, where they are joined by Iorek and Lee Scoresby, an aeronaut.
The party hike north towards Bolvangar, where the children are held. While consulting the Alethiometer, Lyra gets a message about a cabin on a lake. She sneaks out of the camp with Iorek, and inside the cabin they find a psychologically damaged child who has been severed from his dæmon; a process called "Intercision," which is practiced by the Magisterium, the most dominant religious group in the world, in an effort to generate energy. Lyra learns from the Alethiometer that another child is nearby in a Samoyed camp, and she and Iorek head to save him. The opening scenes of the game are shown again. Lyra, Iorek and the two children head back to the Gyptian camp where the two boys are reunited with their families. However, the Samoyeds attack, and Lyra is captured.
She is taken to the General Oblation Board's facility in Bolvangar, where she is reunited with Roger. She is then brought to see Coulter, to whom she lies, saying she was forcibly taken from the apartment, and pretends she is unable to understand the Alethiometer. She then flees from Coulter, sets off a fire alarm and destroys the Intercision machine. With the facility in chaos, the children escape outside. Meanwhile, Iorek and an army of witches led by Serafina destroy the facility.
Lyra, Scoresby and Serafina travel on to Svalbard to try to find Asriel. However, in a snowsquall, Lyra falls overboard and is captured by two panserbjørne. In a Svalbard prison, she learns Asriel is a prisoner of King Ragnar Sturlusson, although he is allowed to carry on his experiments at the special request of Coulter. Lyra learns from the Alethiometer that Iorek is on his way to rescue her. She tricks her way in to see Ragnar and claims she is Iorek's dæmon, created in an experiment at Bolvangar. As panserbjørne do not have dæmons, Ragnar is furious that Iorek should have something he cannot possess, and so Lyra tells him that for her to become his dæmon, he must kill Iorek in single combat. As such, Ragnar orders the guards to allow Iorek to approach. Iorek and Ragnar fight, and Iorek kills Ragnar.
Lyra, Pan and Roger then head to see Asriel. At first, he is furious that Lyra has come, exclaiming "I didn't send for you. Anyone but you," but upon seeing Roger, he calms. Lyra gives him the Alethiometer, and she and Roger go to bed. The next morning, Lyra awakens to find Asriel and Roger have disappeared. Using the Alethiometer, she learns that Asriel plans to perform an Intercision on Roger so as to generate enough energy to open a portal to a parallel universe. She, Pan and Iorek set out after them. They reach Asriel's location in the far north, and Iorek allows Lyra and Pan to head to face him.