Santo and Blue Demon in the World of the Dead aka Santo y Blue Demon en el mundo de los muertos sees our heroes return to the world of fantasy and horror – starting back in 1676 where the Inquisition in Mexico is trying to eradicate a cult of devil-worshippers. Four members are burned at the stake, as Damiana, their high priestess, looks on from afar. Returning to the graveyard where her followers await, Damiana prays for assistance from Satan. Suddenly, the Caballero Azul (Blue Demon) appears: he’s been sent to help her carry out her vengeance – later it is revealed that he is a good person whose soul has been captured by the devil.
Meanwhile, the Caballero Enmascarado de Plata (Santo, wearing his regular mask, pants and boots, but a silver jacket with frilly cuffs, and a silver cape with red lining) meets his beloved, the buxom blonde Aurora. He wants to marry her, but doesn’t want to expose her to the danger that threatens him. Later, the Caballero talks with the Bishop: they suspect that the rich doña Damiana is in league with the Devil but can’t prove it. The Bishop visits Damiana at her house, and when she tries to dissemble, he holds up a cross and watches her cringe. The Caballero is her next visitor, at her invitation. Damiana offers him her love, riches, power, and so forth, if he will pledge his soul to Satan. He refuses; she tries to stab him, and the dagger leaves a triangle burned on his hand when he stops her.
The Caballero is later attacked by three of the cult members who were burned at the stake, but they flee when he brandishes a crucifix. The Caballero Azul shows up for a fight , but disappears in a puff of smoke when the sun rises, and the Caballero Enmascarado de Plata whips out his crucifix.
But in the meantime, Damiana has a paid a visit to the sleeping Aurora, stabbing her to death. The Caballero arrives in time to find his lover in bed, covered in blood, with the dagger in her ample chest. Damiana is caught and sentenced to be burned at the stake. As she burns, she says her descendant, in 300 years, will kill all of their descendants.
Voiceover: “And 300 years later, the curse was carried out!”
Alicia, who is the image of doña Damiana, wakes up screaming. She has had another nightmare. Her father, don Alfonso, comforts her. In a rather odd scene, Santo and Alicia visit an old convent with a group of tourists. They see some mummies and Alicia says she feels she’s been there before; it just happens to be the spot where Damiana was burned at the stake.
Santo and Alicia are engaged to be married, but haven’t set the date. At a party, where half the guests are exact doubles of people from the colonial sequence, Padre Francisco tells another guest that Alicia has been sleepwalking and having hallucinations.
Later, after everyone has gone, Alicia follows a figure veiled in black (Damiana); in the basement, she finds the dagger, hidden in an old dresser. Taking it up to her room, she puts it away. Then, in double exposure, Damiana takes possession of Alicia’s body. Wearing a black slip, she can now walk through walls. Santo is preparing to wrestle at the arena; his assistant Alberto thinks he sees something (Damiana). As the bout goes on, Damiana can be seen (in double exposure) in the audience. Santo’s opponent goes wild, trying to strangle Santo with a towel, hitting the referee, and kicking Santo out of the ring. He’s disqualified.
Padre Francisco is reading about the death of doña Damiana in 1670 (which was 1676 at the start of the film?); the shadowy figure of Damiana comes in to stab him, but is repulsed by the crucifix on his desk. Santo’s assistant Alberto isn’t so lucky. He hears noises in his apartment, and then the lights go out. Grabbing a pistol, he calls Santo on the phone; he shoots at Damiana without effect, and screams.
Santo, leaving to help his friend, is attacked by three ghost wrestlers. The battle continues outside, but the wrestlers flee when a rooster crows, signifying the imminence of dawn.
Padre Francisco, don Alfonso and Santo talk over the case. When don Alfonso expresses disbelief that his daughter is possessed, Padre Francisco reads the story of the Gadarene swine from the Gospel of Luke. They put a crucifix around Alicia’s neck , but while she sleeps, Damiana puts a spell on don Alfonso and he takes it off! The possessed Alicia/Damiana gives the dagger to the ghost wrestlers and tells them to kill Santo.
Santo is back at the arena: his opponent, suspiciously, comes into the ring with a towel completely covering his face. The bell rings, and Santo realizes it’s a ghost wrestler. Then a second, and a third appear! Santo is held down and stabbed in the chest! But, he’s taken to the hospital, and after some stock footage of an operation, is pronounced as good as new.
Later, Damiana drops a big tarantula on Santo as he’s reading; he flicks it off. Padre Francisco and Santo confront Damiana and the ghost wrestlers in a graveyard; when shown a crucifix, the wrestlers vanish. Damiana/Alicia faints. Taken home, a doctor says she is dying. Padre Francisco, always willing to share good news, says that if she dies while possessed, her soul is lost forever. Santo agrees to try and save her. By staring real hard, he enters the red-tinted “world of the dead.”
Santo catches up with Alicia, who passes out. He tries to take her back, but they are attacked by the ghost wrestlers. Suddenly, the Caballero Azul shows up and helps Santo defeat them. Damiana vanishes in a pillar of fire. Santo thanks the Caballero Azul, who replies: “No need to thank me. With this, I earned my liberation after more than 300 years.” He warns Santo that he must cross the bridge between life and death with Alicia before time runs out, or be trapped for eternity. Although nearly surrounded by fire, Santo makes it across the bridge with Alicia in his arms.
As the film ends, Santo and Alicia are walking hand in hand. The narrator says the forces of evil have been defeated!