Drawing on Wuthering Heights after being offered to pen a screen adaptation, Shyamalan went to work on what was originally titled The Woods.[21] The Village was released in July 2004. A drama starring Joaquin Phoenix, William Hurt, Sigourney Weaver, Bryce Dallas Howard, and Adrien Brody, it tells of a small, 19th-century community run by a group of "Elders" who seem to be content in their isolation from the outside world. The village is encircled by a forest said to be filled with mysterious and threatening creatures. Even as an uneasy truce between the villagers and the creatures seems to be falling apart, one villager (Phoenix) starts to question their forced isolation.

With total production costs of $71.6 million, the film grossed $114.2 million domestically ($50 million in its opening weekend) and a further $142 million in non-USA receipts. Its successful opening weekend in America was followed by a severe dropoff of 67%, and the film is generally considered to be a commercial disappointment. Critical response was mostly negative: Desson Thomson of The Washington Post called it "a bewildering disappointment";Kevin Thomas of the Los Angeles Times said, "It's tedious instead of provocative and so unconvincing as to be preposterous." Roger Ebert, who had previously praised Shyamalan, called the film "a colossal miscalculation, a movie based on a premise that cannot support it, a premise so transparent it would be laughable were the movie not so deadly solemn. . . He is a director of considerable skill who evokes stories out of moods, but this time, alas, he took the day off".

Shyamalan expressed a great deal of regret in the way the film was marketed, telling producing partner Sam Mercer, while overseeing the editing of the teaser trailer for Lady in the Water, that he had wished for the The Village to have been sold as a period romance with a scare only at the end of the trailer. Shyamalan is also said to have thought that the shift in the main theme of faith from his previous films to that of deception resulted in the mixed-negative response. Citing that his other movies set out to make an audience believe in the supernatural, The Village set out to do the opposite.

The Village earned an Academy Award nomination for Best Original Score.