Twin sisters Mio and Mayu Amakura are visiting the spot where they used to play as children, which is due to be swallowed by a dam soon, when Mayu, who walks with a limp after a childhood accident, follows a mysterious crimson butterfly deep into the woods. Mio, concerned for her twin, follows, and the two girls are led to a village shrouded in fog. While it seems abandoned, the twins soon realize that the tortured souls of the dead roam, forever reliving the day of the failed ceremony that trapped them in this state.
Mayu soon falls under the village's spell, and beckoned by the crimson butterflies she leads her sister deeper into the village. As Mio chases after her, she slowly learns of the Crimson Sacrifice ritual, the failure of which caused the disaster known as the Repentance which shrouded the village in darkness. Under the village there is a system of tunnels, and at its deepest point there is a deep hole leading to Hell. In order to keep this hole sealed, each pair of twins born in the village is required to perform the ritual where the elder twin strangles the younger[1], after which the soul of the younger twin stays in the village as a crimson butterfly. The last pair of twins, Yae and Sae Kurosawa, tried to escape this fate, aided by Itsuki Tachibana, the remaining twin of the previous, unsuccessful ritual. During their escape attempt, Sae was caught and brought back to the village, while Yae was lost in the woods trying to find her way back. The villagers tried to improvise and complete the ritual with a single twin, and hanged Sae. The attempt failed, and resulted in the Repentance and the disappearance of the village.
Throughout the game, several ghosts refer to Mio as Yae, and seem to expect her to perform the ritual with Mayu, with the exception of Itsuki, whose ghost tries to help her. This is most ominous - if Mio were to remain, her fate would be to be strangled by Mayu in the Crimson Sacrifice ritual.
Near the end of the game, when Mio is finally reunited with her sister and planning their escape, she discovers a document left by a visiting folklorist concerning the twin order[2]. In the village, the twin born second is considered the elder, as she lets the weaker, "younger" twin be born first. This completely reverses Mio's intended fate: instead of being sacrificed herself, she is to strangle her twin sister, a fate which has driven many previous remaining twins to madness and suicide.

Characters:
Mio Amakura: The younger of the Amakura twins and main character of the game. She is spiritually less aware than her twin sister, but also less vulnerable to ghosts. Since Mayu injured her leg while they were playing together, she has felt responsible about the accident.

Mayu Amakura: The elder of the Amakura twins. She has a strong sense of the spiritual, and this leaves her vulnerable to being influenced or possessed by ghosts. She walks with a permanent limp after a childhood accident, and depends heavily on her sister Mio.

Yae Kurosawa: Considered the elder of the Kurosawa twins, although born second[1][2]. Yae tried to escape from performing the ritual with her sister Sae, but they were separated and Yae was lost in the woods. When she found her way back, the village had disappeared, and she lost her memory. She was found by Ryozo Munakata, and they later married. They died in the Himuro Mansion, and their ghosts appear in the first Fatal Frame.

Sae Kurosawa: Considered the younger of the Kurosawa twins, although born first[1][2]. She was less determined to escape from the ritual than her sister Yae, and was content with them being together. They were separated during their escape attempt, in an accident eerily similar to the time Mayu injured her leg. Sae was brought back to the village and hanged in the ritual. Her feelings of having been abandoned by her sister caused her spirit to go mad, and she killed several villagers during the Repentance.

Itsuki Tachibana: Considered the elder of the Tachibana twins, although born second[1][2]. He wanted to escape from the ritual, but his brother Mutsuki was too sickly for the attempt, so they performed the ritual hoping their success would spare the Kurosawa twins from the same fate. The ritual however failed, and Itsuki tried to help the Kurosawa twins escape. When Sae was caught and brought back, Itsuki hanged himself, feeling he had failed to save anyone.

Ryokan Kurosawa: The ceremony master of the village and father of Yae and Sae. He was himself a remaining twin from a ritual, and though he was miserable at his daughters being forced through the same, he was still determined to use them to save the village. He was killed in the Repentance.
Chitose Tachibana: Younger sister of Itsuki and Mutsuki. She was a delicate and shy child, and often hid when there were strangers in the house. She was deeply attached to her brothers, and while she never knew what happened to Mutsuki, she blamed Yae for running away and getting Itsuki locked up. When the Repentance came she hid in a closet, hoping Itsuki to find her. Too scared to come out, she died in the closet.

Seijiro Makabe: A traveling folklorist who visited the village just before its disappearance. He was initially welcomed by the villagers, but this was merely a ruse, as they wanted to use him as a human sacrifice, called a Kusabi. He was captured and tortured, and finally thrown alive into the abyss. He returned during the Repentance, killing the villagers with Sae.

Ryozo Munakata: An assistant of Seijiro Makabe and friend of Itsuki and Mutsuki Tachibana. He was sent away from the village before its disappearance, but he returned on the day of the ritual to fulfill his promise to Itsuki to take care of Yae and Sae after their escape. He only found Yae however, crying on the site the village should have been, and they later married. They died in the Himuro Mansion, and their ghosts appear in the first Fatal Frame.

Masumi Makimura: A land surveyor sent to investigate the area to be submerged due to the dam construction. He wandered into the village where he was trapped, and was soon joined by his girlfriend Miyako Sudo who came looking for him. He was killed by the ghost of the Kusabi trying to find a way out of the village.

Miyako Sudo: Girlfriend of Masumi Makimura. Her ghost is the first you encounter in the game. After Masumi's disappearance, Miyako went looking for him, only to be trapped in the village with him. She was strangled to death by Masumi's ghost after he had been killed trying to find a way out.
Akane and Azami Kiryu: Twins who performed the ritual long ago. Akane strangled her sister Azami, but the ritual left her depressed and guilty. To comfort her, her father made her a doll in Azami's image, and they became inseparable. The doll was possessed by Azami, who also stole Akane's soul, forcing their father to try to kill the doll. He failed, and Akane apparently died soon after.
Yoshitatsu Kiryu: Dollmaker and father to Akane and Azami. He made a doll in Azami's image to comfort his remaining daughter Akane. When he learned the doll had become possessed and stolen Akane's soul, he tried to destroy it, but he was killed by Akane, who was being controlled by the doll.