In 1964, eight year Allen Bauer is on holiday with his family near Cape Code. During a sightseeing tour on a small, he see something below the ocean's surface that fascinates him. Allen jumps into the water, even though he lacks the ability to swim. He grasps the hands of a girl, who inexplicably under the water with him and an instant connection forms between the couple. Allen now has the ability to breath underwater due to him being in the hands of a mermaid. However, Allen is pulled surface by the deck hands and the couple are separated, though apparently nobody else see the girl. Allen comes to believe the encounter was a near-death hallucination, but his bond with the mermaid proves to be relatively strong that his subsequent relationships with other women fail as he seeks the connection he felt with the mermaid.
Years later, Allen is now the co-owner of a wholesale fruit and vegetables business in New York City with womanizer brother, Freddy. Depressed, after his most recent break up, Allen returns to Cape Cod, where he encounters eccentric scientist Dr. Walter Kornbluth. After Allen is left alone when his motorboat conks out, he falls into the sea, and is knocked out when the boat motor hits his head. He wakes up with a headache on the beach, where he encounter a beautiful naked with long blonde hair and is unable to speak who, unknown to him, is the mermaid he met as a child. After, kissing him, she dives into the ocean and leaves Allen to return home. Kornbluth, while diving in order to seek proof of strange sea creatures, also encounters the mermaid in her sea form, causing him to become obsessed with finding her again.
The mermaid finds Allens wallet at the bottom of the ocean and goes to a sunken boat where she finds a map. Using Allen wallet to find where he is, she than decide to find him Now York. She comes ashore at the naked statue of Liberty, where she is arrested for indecent exposure. Using information from Allen's wallet, the police, and strange girl get released into Allen's. During her time Allen she develops the ability to speak English from watch television, and is eager to see life in the big city for the first time in her life. Unable to say true name in human language, she choose a sign from a Madison Avenue. She tells Allen that she will be in New York for "six fun-filled days when the moon is full", but if she any longer she can never go home again (the reason for this is unexplained). Despite Madison unusual behavior, she and Allen fall in love. Allen proposes to Allen, but she declines and runs away. After pondering her reason for coming to the city in the first place, Madison returns to Allen and agrees to marry him, with the add promise of telling him the truth about herself at an upcoming dignitary dinner to welcome the president of United States.
Meanwhile, Kornbluth, realizing that the naked woman at Liberty island was the mermaid he encountered, purses the couple in trying to expose her as a mermaid by splashing water on her. Many of his attempts are a failure, and Kornbluth ends with multiple injuries including a badly broken arm and whiplash. Kornbluth finally lies in wait with water tanks at the dignitary dinner, splashing Madison with an attracted hose and successfully proving the existence of mermaids to the public. Madison is seized by government agents and taken to a secret lab, headed by Kornbluth's rival Dr. Ross for testing on her. Kornbluth regrets his action after he learn Madison is going to be dissected, as he just wanted to prove that he was not crazy.
Allen is shocked by Madison's secret, but when he voices his disillusionment to his brother Fred, his brother lashes out at him, telling his brother how unbelievably happy he was with her. Realizing he still loves Madison, Allen attempt to make contact government officials to let him see Madison, but to no avail. He then confronts a guilt-ridden Kornbluth, who agrees to team up with him to rescue her.
Impersonating Swedish scientist, Freddie and Allen enter the lab with Kornbluth to smuggle Madison outside. Freddie decides to be arrested in Allen's place, while Kornbluth attempts to stop the United States air force with no success from catching the couple. Despite being under hot pursuit by the troops, Allen and Madison make it back to the docks at the New York harbor. Madison tells Allen that he is able to survive underwater as long as he is with her, causing Allen to realize she was the young mermaid he met relatively long ago. Although, Madison warns him if comes to live with her in the sea he cannot return, he jumps in the water after her. They elude their pursers and Allen discards the jacket, signifying forsaking his depressing life on dry land. The credits begin rolling as Allen and Madison swim along the ocean floor together, while Madison shows Allen how beautiful life in the ocean is.The final shot of the film is the loving swimming towards of what happens to an underwater kingdom.