On Christmas Eve, the Stahlbaum household prepares for a grand holiday party. Clara, her brother, Fritz, and their parents have invited guests to dance and celebrate. The arrival of Clara's shadowy and strange godfather, Herr Drosselmeyer, brings a sudden air of mystery to the party. Drosselmeyer is shocked by Clara's adolescence and at first avoids her, until finally he presents a nutcracker for Fritz and a two magical life-sized dolls for Clara. Clara is enamored with the nutcracker, which Fritz has shunned disinterestedly, and Drosselmeyer becomes frustrated that Clara pays little attention to his other creations. Drosselmeyer allows Fritz to steal the key to the life-sized dolls; yet it is not Fritz's mischief that causes them to dance frenetically and frighten the guests but Drosselmeyer's dark manipulations. Afraid that the party has gone awry, Mrs. Stahlbaum calls for the adults to assemble in the dining room for a holiday feast. No longer under the watchful eye of his parents, Fritz and his friends disrupt the girls at play, causing the nutcracker doll to break in two. Drosselmeyer reappears and, to console his goddaughter, repairs the broken doll before leaving in a dash. After a final dance, the guests depart and the family retires for the night.
Just before midnight, Clara steals down to the eerily darkened room to find her nutcracker. She falls asleep, unaware that she and her dreams are under Drosselmeyer's spell. The Rat Queen and her legions of rodents appear, threatening Clara. As the nightmarish taunting escalates, Drosselmeyer shows his power by casting the rodents and furniture away and making the Christmas tree grow to enormous heights. The Nutcracker, grown to life-size yet trapped in toy form, appears with his army of soldiers and cavalry at his side. A fierce battle with the rats and mice ensues. The Rat Queen and the Nutcracker fall injured, despite Clara's bravery in defending the Nutcracker. Ice fairies appear and revive the fallen Nutcracker, who comes to life in his true princely form. The Nutcracker and Clara begin their journey to his homeland and dance among snowflakes in the Land of Snow before boarding a magical ship to carry them away.
Clara and the Nutcracker sail across a lemonade sea towards his homeland, the Land of Sweets, where they are greeted warmly by the Sugar Plum Fairy and her Cavalier. Clara recounts her heroic tale in which the Sugar Plum Fairy presents Clara with a magnificent crown and flavorful dances of foreign confections including the beautiful waltz of flowers, before the entire court joins in a final gavotte. Drosselmeyer reappears, and Clara's reverie begins to fade as she is magically returned to the comforts of home and the memory of a fantastic dream.