In the Pontevedrian embassy, a ball is being held in honor of the King’s birthday. Baron Zeta, the Ambassador, ponders the problem of how to save his country from impending bankruptcy. Meanwhile, right under his nose, the Parisian Camille de Rosillon is wooing Zeta’s wife Valencienne. Camille has just written on her fan what she will not allow him to say: "I love you." They are interrupted by Zeta, and Valencienne drops the fan. Zeta is anxiously awaiting the arrival of Anna Glavari, the widow of a Pontevedrian banker who has left her 20 million. This news makes the Frenchmen Cascada and St. Brioche eager to meet her, which in turn makes Zeta and his councillors, Bogdanowitsch and Kromov, very worried: If the Widow marries a Frenchman, her millions will be lost to the Fatherland. Zeta is determined that Anna shall marry a Pontevedrian, and has selected Count Danilo as the ideal bridegroom, but Danilo has not yet appeared at the ball. He orders his assistant, Njegus, to locate Danilo, and goes off to be ready to greet the Widow. Meanwhile, Camille continues his pursuit of Valencienne. She loves him, but considers her marriage to be sacred. Camille is disappointed but persistent. They leave as Zeta arrives with Njegus, who has finally found Danilo – carousing at Maxim’s. Danilo has promised to come to the ball after one more bottle.

Anna sweeps into the ballroom and is surrounded by a group of hopeful French suitors. She reflects that she might be loved for her millions rather than for herself. Valencienne introduces Camille to her, whispering to Camille that he must end their affair and marry the Widow. Anna, meanwhile, invites everyone to Pontevedrian party at her house later on, and declares that she is ready to dance. Zeta pushes through the crowd of suitors, claims the first dance for himself, and escorts her into the ballroom.

Danilo arrives. He is full of champagne, so he decides to have a nap, which is briefly interrupted by the entrance of Valencienne and Camille. She is in a panic because she has lost the incriminating fan. Camille promises to try to find it. Anna appears and is surprised to see Danilo, to whom she was once engaged. Danilo had wanted to marry Anna, who was a farmer’s daughter, but his uncle would have disinherited him. She bitterly tells him that her millions would now make up for her plebeian blood. Stung, Danilo tells her that she will never again hear him say, "I love you." She throws down her glove as a challenge and leaves. Zeta comes upon Danilo and urges him to marry Anna, but he refuses. He does, however, promise to keep off all foreign suitors. A "ladies’ choice" dance is announced, and Anna chooses Danilo. He refuses to dance, instead offering to "sell" the dance for 10,000 francs, thus discouraging the Frenchmen. Camille is about to offer the money, but the jealous Valencienne stops him. Meanwhile, Njegus finds the lost fan and hands it to Zeta. Danilo and Anna are left alone, and to the strains of the waltz, she is caught up in his arms.

At Anna’s party later that evening, she leads the guests in a Pontevedrian song about the forest nymph Vilia. She tells Zeta that she has arranged a surprise for Danilo: she has re-created Maxim’s in her ballroom. Zeta is thrilled at her apparent interest in Danilo. When Danilo arrives, Zeta warns him that Camille is in love with the widow, for Valencienne has told him so. When he tries to prove it by showing Danilo the fan with Camille’s handwriting on it, Danilo points out that it is not Anna’s fan. Zeta is now anxious to discover who the lady in question may be, and wants Valencienne, who he believes has some influence over Camille, to persuade Camille to give up the Widow for the other lady. The jealous Cascada and St. Brioche now challenge Danilo to a duel. But he and Njegus convince them to withdraw the challenge (and flee to Albania) by claiming that their respective affairs with Bogdanowitsch’s and Kromov’s wives have been discovered. The men all sing of the frustrations of loving women. Anna enters and notices that Danilo is holding a fan. She reads the inscription on it, but he denies that he wrote it and insists that he does not love her. She tells him that she is inclined to marry again; he becomes angry but declares that he will dance at her wedding. They waltz off.

Camille finds Valencienne’s fan. She writes on it, "I am a virtuous wife." He begs her to go with him into the gazebo so they can make love. She finally agrees. Zeta arrives just in time to see Camille and a lady disappear into the gazebo. Determined to find out who the lady is, he looks through the keyhole and is shocked to see that it is his wife. Before he can denounce her, she escapes through another door, and Anna, in order to protect her, takes her place. Zeta and Danilo are amazed when Anna and Camille come out of the gazebo together and announce their engagement. Danilo, furious, runs off to find comfort with the grisettes at Maxim’s. Anna triumphantly realizes that he loves her.