ACT I
Mime's forge in the forest
Mime tries in vain to forge a sword strong enough for Siegfried to kill the dragon Fafner. Siegfried returns from the forest with a bear with which he terrifies Mime. He easily breaks the latest sword on the anvil. Mime reproaches him with ingratitude, reminding him that he has brought him up from childhood. Refusing to believe that Mime is his father, Siegfried manages to extract from him the information that his mother, Sieglinde, had died giving birth to him, leaving the fragments of his father's sword, Nothung. Siegfried demands that Mime reforge this sword and storms out, hoping he may soon be free of the dwarf.
Mime knows he cannot forge the sword, but when the Wanderer (Wotan) appears and offers to answer any three questions on pain of forfeiting his head, Mime asks him only useless questions (about the races of dwarf, giants and gods). When the Wanderer demands a reciprocal question test, Mime is able to answer the first two questions but fails on the third: who will reforge Nothung? The Wanderer tells Mime that his head is forfeit, but he leaves it to be claimed by one who knows no fear.
Mime realises that this is one lesson he has failed to teach Siegfried and tries vainly to make up this omission, but Siegfried is unmoved, even by the mention of the fearsome dragon. Mime has to admit that his skill is unequal to the task of forging Nothung and Siegfried takes to the task himself, breaking all the rules of smithing, but succeeding, while Mime brews a potion he plans to administer to Siegfried when he has killed Fafner, so that he can kill him and seize the ring.
ACT II
Deep in the forest, near the entrance to Fafner's cave
Alberich waits near the cave, hoping that someone will kill the dragon and give him the chance to take possession once more of the ring. The Wanderer appears and, to Alberich's surprise, professes no interest in the ring, but warns him that Mime is bringing Siegfried to kill the dragon. The Wanderer summons Fafner, who rejects Alberich's offer to protect him from Siegfried in exchange for the ring.
Mime brings Siegfried to the spot, promising that here he will learn fear. Siegfried wonders about his mother and listens to the murmurs of the forest, in particular a bird, whose warbling he tries to imitate on a roughly improvised reed pipe. He gives up and blows a call on his hunting horn, which wakens Fafner. Siegfried kills the dragon; when he pulls out his sword, his hand is splashed with blood. As he sucks it clean, he finds himself able to understand the woodbird, which tells him to take the ring and Tarnhelm from the hoard.
Mime and Alberich meet and quarrel, watching with horror as Siegfried emerges with the ring and Tarnhelm. The woodbird warns Siegfried of Mime's intended treachery and when Mime offers him the drugged drink, he is able to understand Mime's thoughts and strikes him dead. The woodbird tells Siegfried of a bride awaiting him on a rock surrounded by fire and he sets off, following the bird.
ACT III
A wild spot at the foot of a mountain
The Wanderer summons the sleeping Erda, once more seeking the benefit of her wisdom, but she answers that she now knows nothing, suggesting first that he ask the Norns (fates) and then Brünnhilde. She is horrifed to learn about Brünnhilde's punishment. The Wanderer then says that he has no need of her advice as he has decided to accept gladly the end of his power; he will leave the world to Siegfried, and Brünnhilde will perform the redeeming deed.
But when Siegfried appears, he is impatient to find yet another old man standing in his path. His youthful brashness arouses the Wanderer's anger and as Siegfried tries to go past, he interposes his spear, pointing out that the sword Siegfried carries has already been shattered by it. Believing that he has found his father's enemy, Siegfried breaks the spear with his sword.
The Wanderer withdraws, no longer able to oppose Siegfried, who climbs the mountain and passes through the ring of flame which surrounds Brünnhilde. After some hesitation he kisses her awake and she greets him ecstatically by name. At first, however, she shrinks from his embrace, reluctant to lose her divine powers, but eventually responds to his passion and they triumphantly proclaim their love.