The Little Mermaid lives in an underwater kingdom with her widowed father (The Sea-King), her dowager grandmother, and her five older sisters, each of whom had been born one year apart.
When a mermaid turns fifteen, she is permitted to swim to the surface for the first time to catch a glimpse of the world above. When the sisters become old enough, each of them visits the upper world one at a time every 365 days. As each returns, the Little Mermaid listens longingly to their various descriptions of the world inhabited by human beings.
When the Little Mermaid's turn comes, she rises up to the surface, watches a birthday celebration being held on a ship in honor of a handsome prince, and falls in love with him from a safe distance. Then a violent storm hits, sinking the ship, and the Little Mermaid saves the prince from drowning. She delivers him unconscious to the shore near a temple. Here, the Little Mermaid waits until a young woman from the temple and her ladies-in-waiting find him. To her dismay, the prince never sees the Little Mermaid or even realizes that it was she who had originally saved his life.
The Little Mermaid becomes melancholic and asks her grandmother if humans can live forever. Her grandmother explains that humans have a much shorter lifespan than mermaids (300 years), but that they have an eternal soul that lives on in heaven, while mermaids turn to sea foam at death and cease to exist.
The Little Mermaid, longing for the prince and an eternal soul, visits the Sea Witch who lives in a dangerous part of the ocean. The witch willingly helps her by selling her a potion that gives her legs in exchange for her voice (her tongue), as the Little Mermaid has the most enchanting voice in the entire world. The witch warns the Little Mermaid that once she becomes a human, she will never be able to return to the sea. Consuming the potion will make her feel as if a sword is being passed through her body. When she recovers, she will have two human legs and will be able to dance as no human has ever danced before; however, the pain of losing her tail will never leave her: she will constantly feel as if she is walking on sharp knives, and her feet will bleed terribly. Moreover, she will obtain a soul only if she wins the love of the prince and marries him, for then a part of his soul will flow into her. Otherwise, at dawn on the first day after he marries someone else, the Little Mermaid will die with a broken heart and dissolve into sea foam upon the waves.
After she agrees to the arrangement, the Little Mermaid swims up to the surface near the prince's castle and drinks the potion. The liquid feels like a sword piercing her body and she passes out on the shore, naked. She is found by the prince, who is mesmerized by her beauty and grace, even though he discovers that she is mute. Most of all, he likes to see her dance, and she dances for him despite suffering excruciating pain with every step. Soon, the Little Mermaid becomes the prince's favorite companion and accompanies him on many of his outings. As she is mute, he confides in her with his deepest thoughts and feelings?but he does not fall in love with her at all.
When the prince's parents encourage him to marry the neighboring princess in an arranged marriage, the prince tells the Little Mermaid he will not because he does not love the princess. He goes on to say that he can only love the young woman from the temple, whom he believes rescued him. It turns out that the princess from the neighboring kingdom was the temple woman, as she was sent to the temple for her education. The prince declares his love for her, and the royal wedding is announced at once.
The prince and princess celebrate their new marriage aboard a wedding ship, and the Little Mermaid's heart breaks. She thinks of all that she has sacrificed and of all the pain she has endured for the prince. She despairs, thinking of the death that awaits her, but before dawn, her sisters rise out of the water and bring her a dagger that the Sea Witch has given them in exchange for their long, beautiful hair. If the Little Mermaid kills the prince and lets his blood drip on her feet, she will become a mermaid once more, all her suffering will end, and she will live out her full life in the ocean with her family. However, the Little Mermaid cannot bring herself to kill the sleeping prince lying with his new wife, and she throws the dagger and herself off the ship into the water just as dawn breaks.
Her body dissolves into foam, but instead of ceasing to exist, she feels the warm sun and discovers that she has turned into a luminous and ethereal earthbound spirit, a daughter of the air. As the Little Mermaid ascends into the atmosphere, she is greeted by other daughters, who tell her she has become like them because she strove with all her heart to obtain an immortal soul. Because of her selflessness, she is given the chance to earn her own soul by doing good deeds for humankind for 300 years, and she will one day rise up into Heaven.