In a small bathroom in an Amsterdam canal house, Clara Staalboom and her little brother Frits are being washed and dressed for the feast of St Nicholas, while their older sister Louise hurries in and out excitedly getting herself ready.
Outside it is snowing. A few people are still skating on the frozen canal, while the guests of the Staalboom family arrive one by one. The last to arrive are the old eccentric Mr Drosselmeier - known to the children as ‘uncle’ - and his young nephew, a navel cadet. Drosselmeier enthrals the children with his magic tricks. He makes time standstill; only when he claps his hands does everyone come to life again and the celebrations can begin.
St Nicholas and his black knave Zwarte Piet call in at the Staalboom’s house and hand out presents.
After they have left Drosselmeier produces a magic lantern and the slides tell the story of a young Princess who rejects the Mouse King’s offer of marriage because she has promised her heart to a handsome Prince. The jealous Mouse King fights a duel with the Prince and casts a spell on him, turning him into a nutcracker doll. In her imagination Clara identifies the bewitched Prince with Drosselmeier’s nephew, who has taken her fancy. Drosselmeier gives her the Nutcracker doll and she is so delighted she dances for it. But Frits spoils it all by breaking off the doll’s head. Drosselmeier punishes him and puts the head back on the body. It is time for the children to go to bed. Clara, however, sneaks back to the drawing room and gives Drosselmeier’s nephew one of her hair-ribbons as a keepsake.
In Clara’s dreams the Mouse King appears by her bedside. He threatens to eat up the Nutcracker. Clara runs to the drawing room to save the Nutcracker. As she peers round the door, the clock strikes twelve and the room begins to change: the walls disappear, the ceiling rises up and strange roots sprout up inside. The piano and cupboard grow bigger and bigger and gruesome mice come tumbling out of all the corners and crevices. The Mouse King emerges from the cupboard, now transformed into a fort, and rats come to the aid of the mice. They join forces to fight the Nutcracker, who is defended by an army of toy soldiers lead by Frits. The Nutcracker is wounded in a duel with the Mouse King. Frits and his soldiers are driven off and Clara and the Nutcracker are left behind in chains. Once they have freed themselves, Clara tends to the Nutcracker’s wounds and he is then transformed into a Prince. The Prince leads Clara to a snow covered pine forest, but even there they find themselves pursued by the Mouse King and his retinue. Just as Clara and the Prince – now transformed back into the Nutcracker - are at their wits’ end, Drosselmeier appears and carries them off in his magic lantern.
Drosselmeier, Clara and the Nutcracker arrive deep inside the magic lantern. This is Drosselmeier’s kingdom. He introduces his mechanics who are responsible for the upkeep of the lantern. All of a sudden the Mouse King and his rats force their way into the lantern. Drosselmeier fights them off with a mechanical cat’s paw and a cat’s eye, which peers inside through the lens. The Nutcracker succeeds at last in killing the Mouse King. The rats all vanish and the magic spell is broken: the Nutcracker finally turns into the Prince once and for all.
The magic lantern continues turning, carrying Clara and her Prince to exotic countries where Clara, in a series of Arabian, Greek and Russian dances, re-encounters her brother Frits, her sister Louise and her parents. After a pas deux between Clara and the Prince, the lantern’s machinery starts to go out of control turning ever faster and more feverishly. Dark clouds appear, Clara is lifted up high, falls…. and wakes up. She jumps out of bed and runs to the front door. Looking along the canal she just catches sight of Drosselmeier and his nephew, who greet her before they disappear into the night.