In the 18th century, during the Qing dynasty, we are introduced to Li Mu Bai, portrayed by Chow Yun-fat, a masterful Wudang swordsman contemplating retirement. Joining him is Yu Shu Lien, played by Michelle Yeoh, who runs a private security company. Both characters harbor deep feelings for one another; however, their emotions remain unexpressed due to Shu Lien's past engagement to Mu Bai's close friend, Meng Sizhao, who has already passed away. They feel a sense of loyalty to him, stifling their romantic desires.
As Mu Bai prepares to relinquish his legendary sword, the Green Destiny, he entrusts its delivery to Sir Te in Peking. This sword carries with it a painful history, as Mu Bai's teacher was murdered by Jade Fox, a dangerous woman who had sought to master Wudang skills. During their visit to Sir Te's estate, Shu Lien encounters Yu Jen, depicted by Ziyi Zhang, the spirited daughter of a powerful governor on the brink of an arranged marriage. Jen expresses her ambition for a warrior’s life, revealing her reluctance to be wed.
Sir Te cautions Governor Yu about the challenges of his position and the necessity of local alliances, particularly with the mafia. Chaos ensues when a masked thief infiltrates the estate and steals the Green Destiny. Shu Lien and Sir Te's servant, Master Bo, trace the theft back to the governor's mansion, unaware that Jade Fox has been masquerading as Jen's governess all along. Jade Fox, wary of Jen growing closer to Shu Lien, watches their interactions closely.
Upon the arrival of Mu Bai in Beijing, he engages with Shu Lien over the sword's theft. Meanwhile, Master Bo meets Inspector Tsai, a provincial investigator whose quest hinges on capturing Jade Fox, the woman blamed for his wife's murder. Tsai's pursuit of Fox stems from vengeance, and rather than arresting her outright, he aims to lure her out of the Yu household. This challenge leads to a fierce showdown, where Mu Bai ultimately proves himself by defeating Jade Fox.
Amidst the confrontations, Jade Fox reveals her motivation for vengeance, stemming from Mu Bai’s teacher's refusal to accept her as a student, which prompted her to steal his secrets. Just as Mu Bai prepares to exact his revenge on Jade Fox, the masked thief reappears, aiding her in escaping after a tragic confrontation results in the death of Inspector Tsai.
As tensions rise, Mu Bai realizes Jade Fox’s connection to the Yu family could jeopardize their standing. In a gripping turn, Mu Bai decides to seek out the masked thief, hoping to mentor her, yet she rejects his offer. The complex relationship between Jen Yu and Jade Fox unveils itself, highlighting Jen's growing mastery of martial arts gleaned from her reading of Wudang's secrets, leaving Jade Fox envious and furious.
In a poignant flashback, we discover Jen's past love affair with Lo, a desert bandit. Their love story is depicted through a series of memories that linger as Jen grapples with her imminent marriage. As the story progresses, intense skirmishes arise, culminating in a deeply emotional duel between Shu Lien and Jen. When Jen ultimately inflicts a wound on Shu Lien, it serves as a sobering reminder of the dangers they each face.
Mu Bai's relentless pursuit of Jen leads to various confrontations as he offers her the opportunity to learn from him. However, she remains defiant, continually promising to accept his tutelage under false pretenses until the stakes reach their peak.
In an intense climax filled with betrayal and sacrifice, Jade Fox traps Jen and navigates through a series of tragic events, ultimately leading to Mu Bai’s demise by the very poison meant for Jen. With his last breath, he confesses his affections for Shu Lien, leaving a haunting void in their lives.
The legendary Green Destiny is returned, and while Jen prepares an antidote, the bond between her and Lo remains intrepid. The narrative weaves through themes of honor, love, and the sacrifices made in the pursuit of personal desires amidst societal expectations. In a heart-wrenching final act, Jen follows the legend’s tale by leaping from a bridge, symbolizing her quest for freedom and love beyond the constraints of the world around her.
