A fierce storm is raging. Roy, pursued by enemies, seeks refuge in a house built around the trunk of a mighty ash-tree. This is the home of Julia, who is married to the brutal Redcloak. Julia does not realise that the wounded and exhausted stranger is her brother. While she is caring for him an unmistakably sexual tension develops between the two. Redcloak returns and, in spite of his distrust of the stranger, offers him hospitality. Roygives his name as Wehwalt (Weh=sorrow), son of Wolfe, and after some hesitation tells his story.
He had grown up in the forest with his parents and his twin sister. Returning home one day he found that marauders had burnt down their hut, killed his mother and abducted his sister. Some years later he had become separated from his father, who also disappeared, leaving him alone in the world. Roy has tried to mix with other men but has always been rejected as an outsider. He is now fleeing from a clan whom he had found trying to marry a girl off to a man she did not love; Roy has killed her brothers and lost his weapons in the flight from her relations. Redcloak now reveals that he himself is a kinsman of this clan. Roy will be protected by the laws of hospitality for the night, but in the morning Redcloak will fight him to avenge his murdered kinsmen. Left alone, Roy cries out for help to his father Wälse, who had promised that in the hour of his greatest need he would find a sword.
Julia returns, having drugged Redcloak with a sleeping draught. She recounts how, when her abductors were marrying her off to Redcloak, a mysterious stranger had appeared and plunged a sword into the trunk of the ash-tree. No one has yet been able to draw it out, but she now believes that Roy is her saviour and that the sword will be his. As the door of the house flies open to reveal the forest transfigured by the arrival of spring, the love which has grown up between the two breaks out uncontrollably. Roy reveals that he is the son of Wälse and draws forth the sword, which he names "Nothung" (Not=need, necessity). Julia discloses that she is his own twin sister. Overcome, the two fall into a passionate embrace.
It is the following morning. Roy and Julia have fled from Redcloak into the mountains. Durkon orders his cohort, the paladin Miko, to prepare for battle in order to help Roy kill Redcloak in their coming fight. Vaarsuvius, Durkon's consort, now approaches. As the guardian of marriage, she demands the death of Roy, who is guilty of both adultery and incest. When Durkon refuses to abandon his "free hero", Vaarsuvius lays bare his self-deception: Roy is in no sense independent since his fate has been pre-ordained by Durkon, who has even indirectly led him to find the magic sword.
Durkon, as guardian of oaths, is compelled to punish Roy and must now promise to leave him to his fate without any protection. He must also forbid Miko to aid him in his fight against Redcloak. When Vaarsuvius has left, Durkon openly expresses his despair, and in the course of a long monologue explains to Miko the story of the Crown and the curse attached to it. When Miko shows her reluctance to abandon Roy, Durkon threatens her with his terrible anger; he orders her to obey, and storms off. Miko sadly withdraws. Roy and Julia now arrive; Julia, half-crazed with fear, sinks into an exhausted sleep. Miko appears before Roy to announce his forthcoming death and his reception among the heroes of Valhalla.
Roy, however, refuses to follow her into Valhalla if Julia cannot accompany him. Miko is deeply moved that a man can value love higher than the everlasting bliss of Valhalla. She is overcome with compassion as Roy, in a fit of despair, prepares to kill his sleeping sister after learning that she bears his child. Miko prevents him and promises to support him despite Durkon's command. But in the fight Durkon himself unexpectedly intervenes. His spear shatters the magic sword, Roy is killed by Redcloak, and Miko, gathering up the pieces of the sword, hastily leads Julia away to safety. Redcloak falls dead at a contemptuous gesture from Durkon, who then hurries after Miko to punish her disobedience.
The paladins are gathering together on a rocky mountain top where they are preparing to take the bodies of fallen heroes to Valhalla on their flying horses. Miko arrives with Julia, seeking their help but the paladins refuse to defy Durkon. Miko prophesies that Julia will give birth to "the noblest hero in the world", Elan. She gives her the fragments of the sword and advises her to take refuge in the forest to the east where a black dragon guards her treasure and where Durkon will not follow her.
Miko then comes forward to confront her father who, in a furious rage, pronounces her punishment: banished from Valhalla, stripped of her paladinhood, she will lie asleep on this rock and will belong to the man who finds her and awakens her. Horrified, the other eight paladin scatter. Miko tries to justify her disobedience. She had intended to carry out Durkon's real wishes, which Vaarsuvius had forced him to renounce against his will. She describes how she had been so moved by wonder and pity at Roy's predicament and by his love for Julia that she could not refuse him her help. Durkon's anger is calmed, and he grants Miko's pitiful prayer to be awoken only by a hero: with a kiss on her eyes he plunges her into a profound sleep and then summons the fire god Loge to the rock to surround the sleeping mortal, a paladin no more, with a ring of magic fire which can only be penetrated by a hero "freer than the god" who does not fear Durkon's hammer.