Giselle lives in "Andalasia", an animated fairy tale world devoid of problems, in which there are talking animals and "happy endings". Prince Edward, Giselle's designated "true love", saves her from the advances of a troll and they plan to get married the following day. Meanwhile, Queen Narissa, Edward's stepmother, schemes to protect the throne. The queen, disguised as an old hag, sends Giselle to New York City's Times Square, designating it as a "place where there are no happily ever afters".
After a number of misadventures, including a minor car accident, an accidental subway ride with a crowd of people, and having her tiara stolen by a homeless man in the Bowery, Giselle runs into a brightly lit billboard, featuring a huge pink castle, advertising "The Palace" casino. Mistaking the billboard image for an actual palace, Giselle attempts to enter the structure she perceives by climbing towards the image. However, Giselle falls and is rescued by Robert, a hardened, yet friendly, divorce lawyer. At the insistence of his daughter, Morgan, Robert lets Giselle stay at their apartment.
Once Giselle is a resident at Robert's apartment, she revives the lifestyle of her home world and recruits urban animals – pigeons, cockroaches and rats – to do the housework while she fashions a dress out of the lawyer's curtains. However, Nancy Tremaine, Robert's girlfriend and a fashion designer, misunderstands the situation and leaves the apartment following a falling out with Robert.
At Robert's law firm, the divorce lawyer's secretary, Sam, is unsuccessful in assisting Giselle's efforts to return to Andalasia. Robert eventually offers Giselle money in Central Park, desperate for them both to separate so that he can continue with his life. However, Giselle meets an old woman who remembers Prince Edward rescuing her after confronting an MTA bus in Times Square to save the old woman, and Giselle decides to give her the money from Robert. Meanwhile, Robert forms a belief that Giselle needs his presence for her own protection and rejoins her. Giselle proceeds to question the divorce lawyer about his expressions of affection towards Nancy, eventually aiding the pair to reconcile by sending flowers and tickets to the "King and Queen's Ball".
Meanwhile, Narissa's henchman, Nathaniel, follows Prince Edward and his chipmuck Pip, the two having journeyed to New York to rescue Giselle. Nathaniel has been given three poisoned apples, along with an order to use them on Giselle. For his first attempt, Nathaniel attempts to kill Giselle by disguising himself as a vendor and one of the poisoned fruits as a caramel apple. However, the plan fails when Giselle inadvertently throws the disguised apple in the air, lodging it in a cyclist's helmet where it singes a bald spot into his hair. Nathaniel questions his adoring, but servile, relationship with Narissa after watching a television soap opera, but he decides to fulfill the queen's order. At an Italian restaurant, Nathaniel serves Giselle a poisoned apple martini, but is stopped by Pip. Angered with her henchman's failures, Narissa visits New York City to kill Giselle.
As Giselle and Robert spend more time together, Giselle discovers that the real world is much more complicated than she realized, while Robert is affected by her optimism and idealism. After a brief argument with Robert, Giselle realizes her own emotional growth and her growing feelings toward him. Edward continues to look for Giselle, eventually finding her at Robert's apartment. While Edward is eager to take Giselle home and marry, she insists that they first go on a date, which she has learned is customary in the real world. They end their date at the King's and Queen's Costume Ball. After Nancy and Prince Edward pair off to dance, Giselle dances with Robert. Giselle realizes that Robert is her true love as he sings the lyrics of the song to her. Edward and Nancy seem to realize the attraction between Giselle and Robert, and also discover a mutual attraction between themselves. Using her old hag's disguise, Narissa poisons Giselle, but her stepson thwarts her escape attempt.
Nathaniel exposes Narissa's plot and reveals that one must kiss Giselle by midnight to break the poison apple's spell. After Edward's kiss fails to wake Giselle up, Robert kisses her. Giselle awakens and admits that she knew Robert was her one true love. Narissa uses the distracting moment to break free. Deciding to write her own ending to the story, she transforms into a dragon. When Robert protects Giselle, Narissa takes Robert hostage, and everyone in the ballroom runs away screaming, Giselle takes Edward's sword to kill Narissa and save Robert. Narissa lures Giselle out the window and up to the top of the Woolworth Building to kill her. However, with Pip's involvement, Giselle and Robert are saved and Narissa falls to her death. Giselle and Robert look at each other and then share a passionate kiss on the roof.
Giselle uses her magical dress-making talents to successfully run Nancy's old boutique shop, assisted by both humans and animals. Both Nathaniel and Pip become successful authors, writing self-help books based on their experiences. Robert, Giselle and Morgan live together, and assumed that eventually Giselle and Robert will marry. Meanwhile Edward and Nancy marry in Andalasia
The end narration states, "And They All Lived Happily Ever After."