Below is a synopsis based on Marius Petipa's original 1892 libretto. The story varies from one production to another, although most follow the basic outline.

Act I

Scene 1: The Stahlbaum House

The ballet is set on Christmas Eve, where family and friends have gathered in the hall to decorate the beautiful Christmas tree in preparation for the party. Once the tree is finished, the children are sent to find. They are in awe of the tree that glows with candles and decorations.

The party begins. A march is played. Gifts are given to children. Suddenly, when the owl-headed grandmother's clock strikes eight, a mysterious figure enters the room. He's Drosselmeyer, Clara's local councilor, magician, and godfather. He is also a talented toymaker who has brought gifts for children, including four realistic dolls that dance to everyone's delight. Then he keeps them for safekeeping.

Clara and Fritz are saddened to see the dolls taken away, but Drosselmeyer has another toy for them: a wooden nutcracker carved in the shape of a little man. The other children ignore him, but Clara immediately likes him. Fritz, however, breaks it and Clara is heartbroken.

During the night, after everyone else has gone to bed, Clara returns to the living room to see how her beloved nutcracker is doing. When he reaches the small bed, the clock strikes midnight and he looks up to see Drosselmeyer perched on top. Suddenly, the mice begin to fill the room and the Christmas tree begins to grow to dizzying heights. The nutcracker also grows to life size. Clara finds herself in the middle of a battle between an army of gingerbread soldiers and the mice, led by their king. The mice begin to eat the gingerbread soldiers.

The nutcracker seems to lead the soldiers, who are joined by tin soldiers and dolls that serve as doctors to carry away the wounded. As the seven-headed Mouse King advances towards the still wounded nutcracker, Clara throws her slipper at him, distracting him long enough for the nutcracker to stab him.

Scene 2: A pine forest

The mice retreat and the nutcracker transforms into a handsome prince. Lead Clara through the moonlit night to a pine forest where snowflakes dance around her, calling them to her kingdom when Act One ends.

Act II

Scene 1: Candy Land

Clara and the Prince travel to the beautiful Land of Sweets, ruled by the Sugar Fairy in the place of the Prince until his return. He tells him how Clara saved him from the Mouse King and transformed him back into himself. In honor of the young heroine, there is a celebration of sweets from around the world: chocolate from Spain, coffee from Arabia, tea from China and candy canes from Russia, all dance for fun; Danish shepherds play their flutes; Mother Ginger makes her children, the Polichinelles, come out from under her enormous hoop skirt to dance; a row of beautiful flowers performs a waltz. To conclude the night, Sugar Plum Fairy and her Cavalier dance.

All the sweets perform a final waltz, after which the Sugar Plum Fairy brings Clara and the Prince down from their throne. He bows to her, she kisses Clara goodbye and leads them to a reindeer sleigh. It takes off while saying goodbye to all the subjects who return the salute.

In the original libretto, the apotheosis of the ballet "represents a great hive with flying bees, closely guarding its wealth." Like Swan Lake, several alternate endings have been created in post-original productions.