The story starts when a man crawls into a tiny village (housed in one building) in eastern North America. He's naked except for a ring on one finger, he has no memory except of motor skills at about the one-year-old level, and his distinctive physical features show that he's from some other planet. The villagers name him Falk; they teach him to speak and teach him about the Earth. It's ruled by the "Shing", conquerors who are said to be the only beings able to lie telepathically.
After six years, Falk sets off alone for the Shing's capital in western North America. He finds many obstacles to learning the truth about himself and about the Shing.
City of Illusions is the first of Le Guin's novels to deal with some of her frequent themes: Taoism (the Tao Te Ching has talismanic value to Falk), liberation, an oppressive male-dominated culture, and perhaps anarchism in the original village and its neighbors.