When poor old widow Berlingot asks Tyltyl and Mytyl, the young son and daughter of her wealthier neighbors, for the loan of their pet bird to boost their sick daughter's spirits, Mytyl selfishly refuses. That night, while the children are sleeping, the Berylune fairy enters their house bearing the image of Berlingot, before transforming into her very beautiful appearance. He insists that children seek out the bluebird of happiness. He gives Tyltyl a magic hat that has the power to show him the inside of things. As a result, the souls of fire, water, light, bread, sugar, and milk are personified and their dog and cat can now talk to their masters. Before leaving, Berylune warns the children that their new companions will all perish once their quest is reached.
The fairy then takes them to various places to search for them. At the Night Palace, the traitorous cat warns the Night Mother, after hearing the fairy's prediction. The dog saves Tyltyl from one of the dangers of the palace. In a cemetery, the dead come to life at midnight, and Tyltyl and Mytyl reunite with their grandmother, grandfather, and siblings. They get a bluebird, but when they leave it disappears. Then, they visit the Palace of Happiness. After seeing various minor joys and pleasures, they are shown the greatest of all - motherly love in the form of her mother. Finally, they are transported to the Kingdom of the future, where children are waiting to be born, including their brother. Nowhere do they find the bluebird.
Returning home empty-handed, the children find that the bird has always been caged in their house. Mytyl gives the bird to Berlingot. He flies away, Tyltyl comforts his troubled neighbor, then turns to the audience and asks viewers to look for the bluebird where they're most likely to find it: home.
