Eight year old Princess Irene lives a lonely life in a wild, desolate, mountainous kingdom, with only her nursemaid, "Lootie" for company. Due to her sheltered upbringing, her father being absent attending to affairs of state and her mother being dead, Irene has never known about the existence of the goblins, which lurk in the underground mines.
These goblins are grotesque and hideous beings, who centuries ago were once human, but due to varying reasons, were driven underground and were malformed and distorted by their new lifestyle. This caused them to despise the humans above the ground and vow revenge against them. Irene and Lootie - who knows of the goblins - stay out late one night and are chased by the goblins, who only appear on the surface at night as sunshine repulses them. Lootie and Irene barely escape the goblins after a miner's child, a boy named Curdie Peterson, appears and sings loudly to the goblins, which drives them away. Curdie states that goblins are repelled by singing, and he and Irene begin to become friends.
However, Curdie soon discovers, after he ventures into the mines and accidentally enters the realm of the goblins, that the goblins are planning a war against the humans on the surface, where they plot to abduct the Princess and marry her to Prince Harelip, the heir to the throne of the goblin kingdom, therefore forcing the humans to accept the goblins as their rulers. The driving force behind this scheme is the vile Goblin Queen, the stepmother of Harelip, who hides a secret - she has toes, a physical trait that goblins do not have and therefore regard with disgust.
WIth the help of Irene's ethereal great-great grandmother, the Princess and Curdie must hatch a plan to defeat the goblins and save the kingdom.