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Demonbane takes place primarily in a region resembling the Lovecraft Country common to several of the Mythos stories, including Herbert West-Reanimator and The Shadow Over Innsmouth. The majority of the plot is confined to Arkham City, the home and headquarters of the Hadou Financial Group as well as the location of the Miskatonic University. Arkham City is also the territory of acriminal organization known as the Black Lodge, which has access to an array of giant mecha as well as a number of powerful sorcerers that make it difficult for law enforcement to effectively combat. A separate portion of the story is set in the coastal town of Innsmouth and one of the climactic battles takes place over the sunken city of R'lyeh. The town of Dunwich is also referenced.
Kuro Daijuuji is a poor detective living in Arkham City. One day, he is asked by Ruri Hado of Hado Financial Group, to search for a magic grimoire. As Kuro searches for the book, he unexpectedly runs into Al Azif, a pretty girl who turns out to be the grimoire Kuro is searching for. While being chased by the Black Lodge, Al forges a contract with Kuro, bestowing him with powerful magic. Soon afterwards, Al also activates Demonbane, a Deus Machina owned by the Hado Financial Group, to combat the mechanical menace from the Black Lodge. With this, the war between the Hado Financial Group and the Black Lodge begins....