While spending a day on a boat at Cape Cod in 1964, young Allen Bauer encounters something extraordinary beneath the surface of the water. Fascinated by what he sees, he dives in, alarming his family. Unbeknownst to them, he has glimpsed a little mermaid. Unfortunately, as he is pulled back to safety, the mermaid is left behind, watching sorrowfully as Allen's family departs.
Fast forward twenty years, and Allen (played by Tom Hanks) now oversees his family's produce distribution business, all while still on a quest for true love. His character is juxtaposed with his brother Freddie (John Candy), who holds a more carefree view on relationships. When his girlfriend breaks things off over the phone, Allen finds himself engulfed in sadness.
Following a work associate's wedding, Allen finds himself intoxicated and spontaneously decides to return to Cape Cod, while Freddie cavorts in Rio de Janeiro with two charming women. Upon his arrival, he meets the irritable scientist Cornbluth (Eugene Levy), who is fervently searching for mermaids in the local waters, but remains unaware of his clumsy crew members as well as Allen's presence.
In a twist of fate, Allen hires a small motorboat to venture towards a nearby island. Shortly thereafter, a mishap forces him overboard. Just as he thinks he might drown, he comes face-to-face with a stunning naked woman (portrayed by Daryl Hannah), who vanishes into the depths. Allen, desperate to learn her identity, is met with silence.
The mermaid picks up Allen's wallet during her watery escapade, whereafter she swims to a sunken ship filled with relics of yore. Utilizing information from his wallet and maps, she uncovers Allen's home address. Days later, to Allen’s astonishment, the mermaid appears naked at the Statue of Liberty, clutching the wallet. He is soon summoned by the NYPD to collect her from the station, and upon her release, he welcomes her into his life.
The next day, Alan's spirits soar, surprising Freddie, to whom he delegatesthe family business responsibilities. Yet, when Allen returns home later, he discovers the enchanting woman missing. After a frantic search, he finds her shopping at Bloomingdale's with an all-new outfit. Shockingly, she is now able to speak, having learned from television in the shop. When he inquires about her origins, she evades detailed answers, but when pressed for a name, she seems confused by the concept until Allen suggests "Madison," which she happily agrees to.
As their days together unfold, Allen becomes increasingly enamored with Madison, discovering her quirks, such as when she panics in the bathroom, claiming she is "shy." During a romantic outing, they encounter a fountain adorned with a mermaid, stirring Allen's memory of something important, though he cannot pinpoint it. Excitedly, Freddie reveals that he has secured tickets to a dinner hosted by the President of the United States. However, Allen insists on taking Madison instead of his brother, leading to playful teasing from Freddie about his budding love.
Madison's appearance at the Statue of Liberty attracts media attention, catching Cornbluth's eye as well. Despite skepticism from his colleagues, he remains steadfast in his belief of Madison's mermaid status, launching a search throughout New York. Meanwhile, as Madison's deadline approaches, Allen proposes, but she unexpectedly denies him, causing tension between them. However, Madison soon returns after some time apart and accepts his marriage proposal.
With plans underway to marry after the President's event, the two share a dangerous secret that Madison wishes to reveal. Yet, their moment is interrupted when Cornbluth discovers Madison's true nature, leading to her being placed in a containment tank at the New York Natural History Museum. Allen is bewildered by the revelation that the woman he loves is a mermaid, causing a rift in their relationship.
Feeling heartbroken, Allen seeks out Cornbluth for help, rallying with Freddie to rescue Madison from her captors. Disguising themselves as Swedish biologists, they manage to break into the laboratory, leading to a frantic escape through Manhattan pursued by military forces.
At last, they reach the Hudson River, where Allen must decide between the surface world and following Madison beneath the waves. Just as he contemplates his choice, he leaps into the water, and Madison, ever his savior, comes to his aid again. Together, they navigate the perils of divers and military pursuers, ultimately making their way to a hidden underwater kingdom after Madison grants Allen the ability to breathe underwater with a kiss.
