The crafty trolls are laughing at the people. They have made a mirror of evil in which everything that is good and kind is reflected as being ugly. The mirror is broken and one of the shards flies around the world, breaking people's hearts and turning them into ice. The Lamplighter begins his tale about Kai and Gerda.
The residents of Odense are making merry on the city's main square. The Grandmother calls on Kai and Gerda to come home. "Don't joke with the snow-storm, don't joke with the frost," she warns. Two trolls appear on the square; they are ready to do anything to spoil the holiday atmosphere and make Kai and Gerda quarrel.
Evening at Kai and Gerda's house. A snow-storm is blowing outside the window. The children are playing a game. At this time the trolls appear in the house. Plunging a shard of the mirror of evil into Kai, they disappear. It is as if the boy has been replaced with someone else: the scent of roses is anathema to him, he mocks Gerda and the Grandmother and speaks with them in a haughty manner. The Snow Queen's voice calls out to him, and in oblivion he speaks again of "eternity and hundreds of stars". The Grandmother knows that the Snow Queen can be heard by those with hearts of ice.
On the square in Odense. The citizens are being entertained by travelling performers. A snow-storm begins. The Snow Queen has arrived and she calls Kai to come to her icy palace. The boy, following her, disappears in the snowy blizzard. The snowflakes abate and the Lamplighter attempts to instil the people with hope: "Wait amid any snowstorm, winter has a brief season."
Dusk in the forest. Gerda has set out in search of Kai and stumbled upon a camp of robbers. The bandits are all too willing to make short work of the defenceless girl. Gerda calls out to Kai and weeps. The Ataman's daughter comes to her defence, bold and wilful. From the Reindeer, a captive of the Little Girl Robber, Gerda learns that Kai has flown with the Snow Queen to the island of Spitzbergen. Gerda's self-sacrifice touches the heart of the Little Girl Robber, and she releases her new friend and gives her the reins of the Reindeer.
The Lamplighter thinks about how the saddest and most dangerous thing in the world is hatred.
The Reindeer has brought Gerda to the Snow Queen's realm. Kai is in one of the halls of her icy palace. He has almost forgotten his previous life and his heart has frozen. The boy is busy with something important – he is creating the word "eternity" from pieces of ice for which he has been promised the whole world and a pair of skates into the bargain. Gerda calls to him, speaking about Odense, home and storks on the roof. It seems that Kai remembers: it is she, Gerda, who appeared to her in a dream, it is she who called to him.
The Snow Queen enters the hall. She freezes the children's hearts and they are about to die. At the last minute Kai rushes to the pieces of ice and instead of the word "eternity" he spells out "I love". The Snow Queen has been defeated and the palace is bathed in sunlight. Kai and Gerda rush back to Odense on the Reindeer where they are awaited by the Grandmother, Lamplighter and the citizens.