The action is set in Spain.
A square outside the house of Dulcinea
As a crowd mills around the square, Dulcinea is serenaded by her four suitors. She reflects on what life holds for women as the years pass by. Don Quixote and his squire, Sancho Panza, are greeted with affection by the townspeople. Delighted, Quixote tells a reluctant Sancho to throw money to the poor. Two of Dulcinea’s suitors, Juan and Rodriguez, discuss Quixote—Juan derides him, but Rodriguez extols the knight’s courage and helpfulness. Quixote, who imagines Dulcinea to be his ideal of womanhood, serenades her. He is interrupted by Juan, who challenges the old man to a duel. This is in turn interrupted by Dulcinea, who dismisses Juan and archly teases Quixote for his adoration, eventually asking him to prove his devotion by retrieving a pearl necklace stolen from her bedroom by the local bandit chief. Quixote agrees, and Dulcinea rejoins her admirers.
Open countryside, dawn
On a misty morning, Quixote begins his quest for the necklace. Along the way, he composes a new serenade for Dulcinea. Sancho, fearing the expedition to be a wild goose chase, launches into a tirade against womankind. At its conclusion, the mists rise and a line of windmills is revealed. Quixote, believing the windmills to be giants, does battle with them.
In the mountains, twilight
Still on the trail of the bandits, Quixote falls asleep. The bandits arrive, and Quixote gives the frightened Sancho permission to hide. Quixote stands his ground but is quickly overcome. As the bandits prepare to murder him, Quixote consigns his soul to God in a prayer of somber simplicity; shamed, the bandit chief asks the old man who he is, and is so moved by his reply that he returns the necklace. Quixote, recalling how the oppressed and the criminal have always understood him, blesses the bandits as he leaves.
Surrounded by her admirers, Dulcinea again meditates on the fate of aging women, and expresses her desire for new passion. She then chases away her melancholy mood with a flamboyant song to her own guitar accompaniment, and the company retires. Quixote and Sancho enter. Imagining that marriage beckons and his days of knight-errantry are over, Quixote promises Sancho a carefree retirement on his own island. Dulcinea returns. Quixote produces the necklace in triumph and solemnly proposes marriage, much to the amusement of her entourage. Dulcinea dismisses them and gently disabuses Quixote of his folly. She explains that because she gives love to whomever desires it, her refusal is proof of her true affection for him. The crestfallen Quixote thanks her at least for her frankness. She leaves, but the guests return to mock the old man. Sancho rebukes them for their cruelty before leading his dazed master away.
A mountain pass, night
Propped up against a tree, Quixote prepares to die. He reminds Sancho of his promise of an island, the only island it is in his power to give—the island of dreams. Gazing up at the planet Jupiter shining brightly in the heavens, he seems to see a vision of Dulcinea as he dies.