It is Christmas Eve and the Stahlbaum family is hosting a Christmas party. The children Clara and Fritz are playing as they welcome their distinguished guests. 

As the party grows more festive, Clara’s godfather Drosselmeyer arrives. He is a skilled toy maker and gifts Clara with a Nutcracker. While Fritz is also presented with an equally nice gift, everyone is delighted by Clara’s Nutcracker. This makes Fritz jealous and angry, so he grabs the Nutcracker from Clara and accidently breaks it. 

Clara is heartbroken and weeps. Fortunately, Drosselmeyer is able to repair the Nutcracker with a handkerchief that he magically pulls out of thin air. As the evening grows late, the guests start leaving. Clara who is afraid to leave her Nutcracker alone, falls asleep by the Christmas tree with the Nutcracker in her arms.