The Paris embassy of the Balkan kingdom of Pontevedro. Baron Mirko Zeta, the Pontevedrian envoy, is concerned that the fortune of Hanna Glawari, a young Pontevedrian widow, is going to be lost to the nation by her remarriage. He hatches a plot to marry her off to a young and eligible Pontevedrian bachelor, Count Danilo. It turns out that the two are former lovers, but Danilo is not interested, because a declaration of love would just put him alongside all the Frenchmen who are after her money. In the ballroom Hanna has to choose a dancing partner, and selects the one man who appears to be ignoring her, Danilo. As a subplot we discover the love of Camille, a French aristocrat, for Baron Zeta's wife, Valencienne.

The following day Hanna hosts a party which begins with Pontevedrian dances and songs. Hanna sings the famous "Vilja Lied", about an alluring forest sprite. After various complications Hanna announces her engagement to Camille, a French aristocrat. Danilo, unable to disguise his grief, storms off to Maxim's, his favourite cabaret. Hanna realizes he loves her.

Hanna's house is decked out as Maxim's. Danilo asks Hanna not to marry Camille in order to save the Pontevedrian economy. Danilo and Hanna confess their love for each other.