Mime, a Nibelung, has raised Siegfried since the boy’s mother, Sieglinde, died in childbirth. Mime hopes that Siegfried will slay Fafner, who, having used the Tarnhelm to turn himself into a dragon, now lives in the forest, guarding the ring and the Nibelung treasure, which Mime covets. Mime acquired the pieces of Siegmund’s sword, Nothung, from the dying Sieglinde. He knows that Siegfried will need the sword in order to kill the dragon, but Mime has been unable to repair the weapon.
Siegfried bursts into Mime’s cave and quarrels with his foster father. When—under duress—Mime finally tells Siegfried about his mother and shows him the fragments of Nothung, Siegfried demands that Mime repair the sword and runs off into the forest.
Wotan enters, disguised and calling himself the Wanderer. After a game of riddles with Mime, he tells the dwarf that only a man who does not know fear can repair Nothung and that this fearless man will be Mime’s doom. When Siegfried returns, Mime learns that the boy does not understand fear. Mime tells Siegfried that Fafner, the dragon, will teach him fear.
Impatient with Mime’s inability to repair the sword, Siegfried forges Nothung anew. Mime brews a drink with which he hopes to poison Siegfried after the boy has killed Fafner. The exuberant Siegfried tests the re-forged Nothung by splitting Mine’s anvil in two.
Alberich watches Fafner’s cave, hoping to discover a way to regain the ring. Just before dawn, the Wanderer appears and warns Alberich of Mime’s plan. The god awakens Fafner so that Alberich may warn him of the danger that approaches, but the dragon ignores the warning. As the sun rises, Mime and Siegfried arrive, and Siegfried drives Mime away. Siegfried carves a crude reed flute and tries to imitate the sound of a forest bird. Failing at that, he tries playing on his hunting horn. The noise awakens Fafner. In the ensuing battle, Siegfried drives his sword into the dragon’s heart. As he dies, Fafner warns Siegfried to beware of the one who urged his murder.
Withdrawing his sword from Fafner, Siegfried gets the dragon’s blood on his hand. The blood burns, and Siegfried puts his hand to his mouth. When he next hears the singing of the Forest Bird, he understands its words. It tells him of the Nibelung hoard, the Tarnhelm, the ring, and Mime’s secret intentions. Mime approaches Siegfried with flattery, but Siegfried, knowing the dwarf plans to murder him, kills him.
Siegfried now feels very alone. The Forest Bird tells him about a woman who sleeps on a rock, surrounded by flames. Excited, Siegfried follows the Forest Bird to find Brünnhilde.
Wotan awakens Erda to seek her counsel. Erda suspects him of trying, still, to manipulate events, but he insists that she is mistaken: he is now ready to accept his fate—and with joy. He lets her go back to sleep.
Wotan blocks Siegfried’s path up Brünnhilde’s mountain, telling the boy that Nothung was shattered once before by Wotan’s spear. Believing that he has found his father mortal enemy, Siegfried impulsively breaks the god’s spear with his sword. Wotan, his power at an end, has to let him pass.
Siegfried proceeds through the flames and finds Brünnhilde, asleep on her rock. He removes her warrior’s armor. Discovering a human creature different from himself, a woman, Siegfried suddenly understands the meaning of fear. He awakens her with a kiss. Brünnhilde is at first joyful, then terrified, for she realizes that she is no longer a goddess. The strength of Siegfried’s passion overcomes her doubts, and they rejoice in their love.