In early 1900s London, Kate Croy lives under the careful watch of her domineering Aunt Maude, who is determined that the young woman does not follow in the path of her recently deceased mother, whose dissolute husband, Lionel, squandered her wealth in order to support his opium addiction. Maude wants Kate to marry the well-off Lord Mark, who has a title and estates, despite the fact that Kate does not love him. Kate is dependent on her wealthy aunt's goodwill and abandons her plans to defy her aunt when she is reminded that her father is at Maude's mercy as well. Kate's boyfriend, the financially struggling muckraking journalist Merton Densher, wants to marry her, but is skeptical of Kate's intentions despite her pleas for him to wait as she tries to find a way out of her dilemma.
One day, Kate is introduced by Lord Mark to the wealthy and outgoing American orphan and heiress Millie Theale, who is on an extended trip through Europe with her best friend Susan Stringham, and the cynical Kate is captivated by Millie's beauty, openness, and amusement at the conventions of society. Millie and Kate become fast friends and Millie invites Kate to accompany her and Susan to Venice as part of their excursion. Prior to their departure, Millie meets Merton, with whom she is smitten, and she asks him to join them.
Lord Mark secretly reveals to Kate that Millie is terminally ill, and that he desires Kate but has to marry Millie to avoid losing his estates. Knowing Millie is repulsed by Lord Mark's crudity, she decides to adopt his scheme and persuade Merton to woo Millie. She fully expects Millie's generous nature will lead her to include Merton in her will, making him wealthy enough to satisfy her aunt and allow them to marry. He despises her scheme but can't resist the opportunity to be in Venice with Kate.
Over the next several days, Kate becomes so jealous of the genuine affection growing between Merton and Millie that she lures him away one night, abandoning Millie in a crowd. Millie confronts her the next morning and Kate realizes she must leave, without warning Merton, if her scheme is to succeed. What neither she nor Merton anticipate is how things will change when she is gone.
Some months later, following Millie's death in Venice, Kate comes to Merton's flat. She asks why he has not come to see her and finds a letter, telling Merton that Millie did indeed bequeath a sizeable portion of her estate to him. He tells Kate that he will not take the money, and she must marry him without it, if she will. She agrees, and they re-cement their bond by making love. But afterwards, Kate asks him to tell her that he is not still in love with Millie, or his memory of her, and he cannot. So, Merton returns to Venice...alone.