The film is set in the Qing Dynasty during the 43rd year of the reign of the Qianlong Emperor. Li Mu Bai is an accomplished Wudang swordsman. Mu Bai, intending to give up his warrior life, asks Shu Lien to transport his sword, also referred to as the Green Destiny, as a gift for their friend Sir Te. Jen, destined for an arranged marriage and yearning for adventure, seems envious of Shu Lien's warrior lifestyle.A masked thief sneaks into Sir Te's estate and steals the sword at night. Mu Bai makes the acquaintance of Inspector Tsai, a police investigator from the provinces, and his daughter May. Fox challenges the pair and Sir Te's servant Master Bo to a showdown that night. Following a protracted battle, the group is on the verge of defeat when Mu Bai arrives and outmaneuvers Fox. Before Mu Bai can kill Fox, the masked thief reappears and partners with Fox to fight. Fox resumes the fight and kills Tsai before fleeing with the thief. After seeing Jen fight Mu Bai, Fox realizes Jen had been secretly studying the Wudang manual and has surpassed her in skill.
一代大侠李慕白有退出江湖之意，托付红颜知己俞秀莲将自己的青冥剑带到京城，作为礼物送给贝勒爷收藏。这把有四百年历史的古剑伤人无数，李慕白希望如此重大决断能够表明他离开江湖恩怨的决心。谁知当天夜里宝剑就被人盗走，俞秀莲上前阻拦与盗剑人交手，但最后盗剑人在同伙的救助下逃走。有人看见一个蒙面人消失在九门提督玉大人府内，俞秀莲也认为玉大人难逃干系。九门提督主管京城治安，玉大人刚从新疆调来赴任，贝勒爷即不相信玉大人与此有关，也不能轻举妄动以免影响大局。

At night, a desert bandit named Lo breaks into Jen's bedroom and asks her to leave with him. A flashback reveals that in the past, when Governor Yu and his family were traveling in the western deserts, Lo and his bandits had raided Jen's caravan and kidnapped her. However, Lo and Jen soon fell passionately in love. Lo eventually convinced Jen to return to her family, though not before telling her a legend of a man who jumped off a cliff to make his wishes come true. Because the man's heart was pure, he did not die. Lo came to Peking to persuade Jen not to go through with her arranged marriage. However, Jen refuses to leave with him. Later, Lo interrupts Jen's wedding procession, begging her to come away with him. Nearby, Shu Lien and Mu Bai convince Lo to wait for Jen at Wudan Mountain, where he will be safe from Jen's family, who are furious with him. Jen runs away from her husband on the wedding night before the marriage could be consummated. She fights several warriors in an inn and is victorious.
俞秀莲为了不将事情复杂化一直在暗中查访宝剑下落，也大约猜出是玉府小姐玉娇龙一时意气所为。俞秀莲对前来京城的李慕白隐瞒消息，只想用旁敲侧击的方法迫使玉娇龙归还宝剑，免伤和气。不过俞秀莲的良苦用心落空，蒙面人真的归还宝剑时，不可避免地跟李慕白有了一次正面的交锋。而李慕白又发现了害死师傅的碧眼狐狸的踪迹，此时李慕白更是欲罢不能。

Jen visits Shu Lien, who tells her that Lo is waiting for her at Wudang Mountain. After an angry dispute, the two women engage in a duel. Wielding the Green Destiny, Jen destroys each weapon that Shu Lien wields until losing to a broken sword held at her neck. When Shu Lien shows mercy and lowers the sword, Jen injures Shu Lien's arm. Mu Bai arrives and pursues Jen into a bamboo forest. Following a duel where Mu Bai regains possession of the Green Destiny, he decides to throw the sword over a waterfall. In pursuit, Jen dives into an adjoining river to retrieve the sword and is then rescued by Fox. Fox puts Jen into a drugged sleep and places her in a cavern; Mu Bai and Shu Lien discover her there. Fox suddenly reappears and attacks the others with poisoned darts. Mu Bai blocks the needles with his sword and avenges his master's death by mortally wounding Fox, only to realize that one of the darts hit him in the neck. Fox dies, confessing that her goal had been to kill Jen, because she was furious that Jen hid the secrets of Wudan from her.
玉娇龙自幼被隐匿于玉府的碧眼狐狸暗中收为弟子，并从秘籍中习得武当派上乘武功，早已青出于蓝。在新疆之时，玉娇龙就瞒着父亲与当地大盗“半天云”罗小虎情定终身，如今身在北京，父亲又要她嫁人，玉娇龙一时兴起冲出家门浪迹江湖。

As Jen exits to retrieve an ingredient for the antidote for the poisoned dart, Mu Bai prepares to die. With his last breaths, he finally confesses his love for Shu Lien. He dies in her arms as Jen returns, too late to save him. The Green Destiny is returned to Sir Te. Jen later goes to Wudang Mountain and spends one last night with Lo. The next morning, Lo finds Jen standing on a balcony overlooking the edge of the mountain. In an echo of the legend that they spoke about in the desert, she asks him to make a wish. He complies, wishing for them to be together, back in the desert. Jen then leaps over the side of the mountain and into the clouds.
任性傲气的玉娇龙心中凄苦无处发泄，在江湖上使性任气，俨然是个小魔星。俞秀莲和李慕白爱惜玉娇龙人才难得，苦心引导，总是无效。在最后和碧眼狐狸的交手之中，李慕白为救玉娇龙身中毒针而死。玉娇龙在俞秀莲的指点下来到武当山，却无法面对罗小虎，在和罗小虎一夕缠绵之后，投身万丈绝壑。