The film begins by showing a pair of clasped hands, and a woman's voice is heard, whispering that all she ever wanted was to help the children, not hurt them, and that more than anything, she loves children.
In the first scene, Miss Giddens (Deborah Kerr) is applying for a job as a governess. It is her first position, but the wealthy bachelor interviewing her (Michael Redgrave) is unconcerned with her lack of experience. He values his freedom to travel and socialize and unabashedly confesses that he has "no room, mentally or emotionally" for his niece and nephew, who were orphaned and left in his care as infants. His previously employed governess, Miss Jessel, died suddenly less than a year ago and he is desperate to find someone else to teach the children and keep them company. He says that all he cares about is that she accepts full responsibility for the children and does not trouble him with whatever problems may arise. Miss Giddens is instantly charmed by her suave employer and promises to do her best, assuring him that she loves children above all else and that she has an "imagination," making her ideal to work with children.
Upon arriving at Bry, the sprawling English estate where The Uncle keeps the children, Miss Giddens hears a woman's voice calling for Flora, the little girl. Moments later, she meets Flora, and is instantly taken with the bright, quirky child. She also forges a fast friendship with Mrs. Groce (Megs Jenkins), the kindly housekeeper. The boy, Miles, is away at boarding school, though Flora delightedly insists her brother is coming home. Sure enough, Miss Giddens receives a letter saying that Miles has been expelled from school because of his bad influence on the other boys. Mrs. Groce says she can't imagine Miles being a bad influence, and when Miss Giddens meets the boy herself, she too feels sure his teachers must have exaggerated. Apart from evading all her questions about his experience at school, she finds Miles as enchanting as Flora. At first he seems polite, composed, and mature -- perhaps even too mature, with his flirtatious flattery toward the pretty Miss Giddens.
While tending to the rose bushes the next day, Miss Giddens sees the shadowy figure of a man standing atop one of Bry's towers. When she climbs the stairs to investigate she finds only Miles, playing with the pigeons, who insists he saw no one.
On a rainy day Miss Giddens forgoes the day's schooling to play hide-and-seek with the restless children. While searching for them, she sees a woman cross the hall in front of her and disappear. Searching the attic, she stumbles across a photograph of a darkly handsome man, and is gazing at it when Miles sneaks up on her and wrestles her playfully. Miss Giddens tells him to stop, that he is hurting her, but he doesn't stop until Flora bursts in on them and tells Miss Giddens to go hide. She goes to hide downstairs behind the curtains, and through the window she sees a man leering at her. The figure is gone by the time Mrs. Groce comes to investigate her screams. When describing the man to Mrs. Groce, Miss Giddens realizes the man in the window was the same she saw in the photograph. Mrs. Groce explains that the man in the photograph is Peter Quint, who served as valet there before he died, presumably of head trauma from tripping on the stairs outside. She mentions that Miles was intensely devoted to Quint, that he absolutely "worshipped" him and trailed him everywhere like a dog, much as Flora latched onto Miss Jessel.
Miss Giddens is yet more disturbed when she sees a mysterious woman from across the pond. She is certain that Flora can see her as well, though the little girl evades her questions. When Miles recites a monologue invoking a "lost lord" to rise from the grave, Miss Giddens believes this confirms that the children are possessed, and presses Mrs. Groce for more information about Peter Quint and Miss Jessel. Mrs. Groce reluctantly tells her that the two were entangled in a perverse relationship: Quint was physically and emotionally abusive to Miss Jessel, but the more he beat and scorned her the more she seemed to adore him. They were also obscenely indiscreet with their relations, performing sexual acts in plain sight of the other servants and even the children. After Quint's fatal accident, far from being relieved by her tormentor's death, Miss Jessel went into a deep depression and, as Mrs. Groce grudgingly reveals after days of prompting from Miss Giddens, soon drowned herself in the lake where Miss Giddens believes she saw her.
Miss Giddens rapidly develops her theory of the children's possession by their former caretakers. She confides to Mrs. Groce that she believes the ghosts of Quint and Miss Jessel inhabit the bodies of the children so they can carry on with their sexual acts. The behaviors she once found charming and precocious in the children she now finds suspicious and unnerving, but is determined to rescue them from this hell she is sure they are trapped in. She tells Mrs. Groce that she must go to see the children's uncle to tell him of the haunting, insisting, before Mrs. Groce can even accuse her of such motives, that this is not a subconscious trick to get the handsome uncle to notice her.
However, when Miss Giddens is about to leave, she sees Miss Jessel again, sobbing. Miss Giddens changes her mind then, afraid to leave the children alone with their tormentors. That night from the dark hall she hears unearthly noises, including malicious laughter from the children. When she checks on Flora she finds her at the window, and Flora says there is someone down in the garden. It turns out to be Miles. When Miss Giddens crossly sends him to bed, he cheerfully tells her that he was out of bed because he was afraid he was becoming "boring," being so well-behaved, and hoped to impress her with this small act of rebellion. Miss Giddens then finds a dead pigeon under his pillow, its neck having been snapped. Miles says he plans to bury it the next day, and before Miss Giddens leaves, he kisses her goodnight, deeply and passionately on the lips as a grown man would.
The next day, Miss Giddens writes a letter to the children's uncle, and while she is writing it Flora sneaks off. Miss Giddens finds her dancing with an imaginary (or invisible) partner down by the lake. While she is asking Flora how she rowed across the lake by herself, Miss Giddens again sees the figure of Miss Jessel staring mournfully at them from across the lake. Convinced that the children will be freed from the possession if they will only admit what is happening to them and who is doing it, Miss Giddens frantically begs Flora to admit that Miss Jessel is there. Flora begins to scream and cry, calling Miss Giddens wicked and insane. Mrs. Groce comes to investigate and escorts the child to bed. Hours later, Flora is still hysterical, and when Mrs. Groce finally leaves her bedside, she says she can't imagine where Flora learned such obscenities. Mrs. Groce then says that she did not see the figure at the lake and that the children were sweet and well-behaved until Miss Giddens came. Though deeply hurt that her one ally now doubts her sanity, Miss Giddens reminds Mrs. Groce that the uncle left her in charge and orders her to take Flora away and tells the other servants to leave. She feels certain that Miles is on the brink of confessing his ordeal to her and that she must be left completely alone with him. She cannot find her letter to the uncle, and accepts that Miles must have stolen it. When Mrs. Groce asks what she is to tell their uncle, Miss Giddens responds that of course she must tell him the truth, and Mrs. Groce agrees sadly, clearly intending to tell the uncle of Miss Giddens' instability.
That night when alone with Miles, Miss Giddens tries to get him to talk about the ghosts, but he is his usual glib self. She then asks again why he was expelled from school, and Miles eventually admits that he frightened the other boys with his strange outbursts of violence and vulgar language. Miss Giddens asks repeatedly who he learned this language and behavior from, tearfully promising that all she wants is to help him, that her caring nature demands her to help others "even if it hurts them." She soon pushes Miles too far, and he begins yelling that she is nothing but a "hussy" and laughs maniacally. While he is ranting, Miss Giddens sees Peter Quint's face appear in the window behind him, joining in the boy's laughter. Miles then hurls Flora's beloved pet turtle through the window and runs outside. As Miss Giddens chases him, he trips on the stairs outside and hits his head. Miss Giddens catches up to him and cradles him gently, and he whimpers humbly for her to forgive him. She tells him it's not his fault, that all he has to do is "say his name" and it will all be over, she alone will "have" him. Miles tries to run away in horror but she catches him and will not stop begging him to say the name. She sees Peter Quint appear standing on the hedge beside them, but Miles does not seem to see him and is screaming that she is insane. He finally shouts Quint's name, and the figure disappears. Miles frantically asks Miss Giddens where she saw him, and then immediately falls to the ground. Miss Giddens again cradles him and assures him that it's over, he is free. She then realizes that Miles is dead. Screaming and sobbing in horror, she then leans over him and kisses him passionately on the lips. The film ends on the image of her clasped, shaking hands, the same image it began with.