Mime, the world's greatest smith, tries in vain to forge a sword strong enough not to break in Siegfried's hands. Siegfried arrives, bringing a bear to scare Mime into making it faster. The sword is finished, so the bear is set free - the first unbinding done for free (0) in the Ring. The sword breaks in Siegfried's hands. He chides Mime for his supposed lack of skill, and Mime accuses poor repayment of his supposed love of Siegfried.
Siegfried ask what keeps him bound to return to Mime's cave every day, since he does not love him. He answers himself - to find out who his parents are. Mime tells him he is both his father and mother. Siegfried proves that Mime is lying and doesn't truly love him. Demanding to know the truth, Siegfried uses physical force to pry it out of Mime, who tells him only sketchy details, then finally shows him the remains of Nothung. Siegfried, elated, orders Mime to forge it whole by the time he returns.
After Siegfried leaves, the Wanderer Wotan arrives to seek the warmth of Mime's hearth as guest. Mime denies it, and Wanderer wagers his head in a contest for the right to so warm himself - he must answer correctly any three questions Mime asks. The questions are pedantic, and not helpful for the questioner - who lives Below the Earth, who lives upon the Earth, and who lives Above it. Wanderer prevails, chiding Mime for not asking questions close to his heart, then asks three questions of Mime in wager for his head - what race does Wotan love best but treat worst, what is the name of the Sword Siegfried will use to slay Fafner and win the Rhinegold and Ring, and who will forge Nothung anew. Mime answers the first two easily, but cannot answer the third. Winning Mime's head, Wanderer gives him the answer - he who does not know fear - Siegfried, to whom Wanderer bequeths Mime's head. Wanderer departs, and Siegfried returns.
Siegfried complains that the sword is not yet forged. Since Mime knows he cannot control the actions of the fearless, he tells him a sword is useless if one doesn't know fear. He demands to learn what fear is, and Mime says Fafner will show him. Told that Fafner's hole is near the outside world, Siegfried sets about forging Nothung anew by himself, to slay Fafner, learn fear, leave Mime and head out to the world. While he forges, Mime brews a sleeping potion to give him after winning the Rhinegold and Ring so as to kill him and steal the treasure. Siegfried takes the newly reforged Nothung and splits Mime's anvil in two, and heads off to Fafner's Cave, Neidhohle, to learn fear and win the treasure he guards.
Alberich keeps watch over Neidhohle in endless quest to reclaim the Ring. Wanderer arrives, is accused of plotting to steal the hoard, and avows that he has come only to observe. He aids Alberich by waking Fafner that Alberich might warn him of Seigfried's coming and request the Ring as reward. Fafner, refusing, goes back to sleep. Departing, Wanderer further aids Alberich with advice to look to his brother instead of to him for a rival. Wanderer takes to the sky on his steed, and Alberich hides in a rock fissure.
Siegfried and Mime arrive with the dawn. Siegfried sits under a Limetree and hears of Fafner's three weapons - teeth (Shin), poison spittle (Qoph), and his great lizard's tail (Tav). He vows not to offer himself to his teeth, to step aside of his spittle, and be cautious of his tail, keeping "an eye upon the evil one". Mime speaks of his love for him, causing Siegfried to spring up to stop his dishonest talk, and sends him off. Mime hides by the spring where sleeping will drink, waiting to give Siegfried a sleeping potion to drink.
Siegfried sits under "family tree" for the second time, and daydreams about his parents. A bird attracts his attention, and he tries to return its song, making and playing a reed pipe, failing in two attempts to play a tune. The third time, he plays a tune on his horn, waking Fafner.
Fafner goes toward the spring for a drink, Siegfried confronts him, and they battle. Siegfried successfully evades Fafner's three weapons and runs Nothung through Fafner's heart. Fafner, in his last moments, tenderly regards the boy as a "Rosy Hero", warns him of the Ring curse and Mime's plot to kill him. Siegfried asks Fafner if he knows is parentage, and gives his name that he might divine it. Fafner roars "Siegfried....!" and dies - Siegfried having failed in his second attempt to learn his parentage.
As Siegfried pulls Nothung out of Fafner, his hand is bloodied, and the blood burns him. He puts his fingers to his lips, and the blood confers understanding of birdsong. The bird that previously sang to him sits atop the Limetree, telling Siegfried to take Tarnhelm and Ring from the hoard. While inside Neidhohle, the brothers Mime and Alberich argue, before the carcass of a dead brother-murderer, each's right to the treasure. When Siegfried emerges, Mime disappears in the Wood, and Alberich in the Rock.
The bird now tells Siegfried what Fafner told him about Mime, adding that he will hear Mime's true intentions by virtue of the magical blood. Mime returns, congratulates him, and tries to convince him to drink his potion. Siegfried hears Mime speak his secret intentions, and confronted with them, denies it, until they become so disgustingly evil that Seigfried runs him through with Nothung. He puts Mime's body in Neidhohle, stopping it up with Fafner for a "watchman".
He goes under the Limetree for the third and final time. He calls to the bird, who tells him of a wife waiting for him to claim her, surrounded by fire, that no one who knows fear make break. He exclaims that man is him, and the bird leads him to the background in the way to Brunnhilde's Fell, having had his first purification and consecration.
On a rocky height between Neidhohle below and Brunnhilde's Fell above, Wanderer summons Erda with the formula of the Magic Circle and Triangle of manifestation - Wanderer/IHVH triambulates before her hole, thrusts his SpearTip over the center, and recites "The Evocation of Erda". She arises, asks who has summoned her from her sleep, and he responds "The Wakener". He questions her about what should be done to slow and control the wildly-spinning wheel of fate. First she bids him talk to the Nornen, but Wanderer retorts they cannot change what they spin. Second, she bids him talk to Brunnhilde, not knowing her fate, which Wanderer explains. Third, Erda admonishes him, then bids him release her, Wanderer refusing to unbind her. He tells her her wisdom kept his actions fettered, and insists she tell him what he should do. She then he accuse each other of not being who they think they are, but Wanderer wins the argument - he asks Erda "What is Wotan's Will?" - and the all-knowing one has no answer. Now he must counsel Erda as she counselled him in Das Rheingold. He explains the end of the Gods no longer trouble him - it is in fact his wish. Rather than fearing it, he embraces it. He tells of beloved Siegfried who will overthrow him and his law and wake Brunnhilde, and of Brunnhilde's performing an act that will save the world. He unbinds Erda from his spell, bids her rest in Eternal Sleep, and she sinks into the Earth.
Siegfried arrives, the bird flies off, and storm clouds surround. Wanderer denies Siegfried passage, explaining the bird that brought Siegfried this far knows better than to defy him who guards the path. Siegfried challenges Wanderer, and as lightning crashes, Nothung shatters the Spear in half, as once the Spear had done to Nothung. Powerless, his old order having been shattered, Wanderer concedes defeat and lets Siegfried by, having had his second purification and consecration.
Siegfried breaks through the fire to Brunnhilde's Fell. He awakens his bride with a kiss, his third purification and consecration. The bird turns back into Grane, Brunnhilde's horse. They passionately declare true love for one another, Brunnhilde at first demuring from, and then rejoicing in, her lost Divine maiden stature. The curtain falls as they lie down together for his fourth and final purification and consecration.