Barbie and her little sister Kelly practice ballet steps, but Kelly cannot master them. Upset, Kelly gives up, but Barbie tells her about Clara, a brave girl. At Christmas, Clara receives a Nutcracker doll from her Aunt Elizabeth. Clara falls asleep in her parlor with it but the parlor is invaded by a Mouse King and his army, searching for the Nutcracker. Nutcracker comes to life and fights, but when Clara tries to help she is shrunk. When the army retreats, thanks to Clara hurling her shoe at the Mouse King, Nutcracker tells her he only looks like a Nutcracker because of the Mouse King. Both victims of the evil king’s magic, they have to find the Sugar Plum Princess, the most powerful faerie in Parthenia.
Clara receives a necklace which will let her return home at any time, at her normal size, and she and the Nutcracker go through a mouse hole. It leads to caves made of ice, and leave there thanks to snow faeries breaking the ice. They enter Parthenia, where the Mouse King is ruling, and the king’s spy, a bat named Pimm, sees Clara and the Nutcracker. He goes to inform his matster and he sets the soldiers to capture the Nutcracker. Clara and Nutcracker go to a destroyed Gingerbread Village and meet two children and a horse. The children, Peppermint Girl and Gingerbread Boy, and the horse, Marzipan, travel with Clara and Nutcracker because they are alone.
Clara learns that Prince Eric is the rightful ruler of Parthenia, but he mysteriously disappeared. The group goes into a forest but soldiers chase them, so they hide in the treetops. They meet Major Mint and Captain Candy, and some villagers, who interrogate them. Nutcracker is thought to be a “wooden spy”, but he and Clara explain they are searching for the Sugar Plum Princess, who will put an end to the Mouse King’s reign. Major Mint does not believe their plan will work, but he and Captain Candy decide to go with Clara and Nutcracker.
The children stay with the villagers and Clara tells Nutcracker she has figured out that he is Prince Eric, but he does not want to be the prince as his subjects think lowly of him; he just wants to make them happy. Meanwhile, the Mouse King punishes his soldiers for not capturing Nutcracker and looks in a book for information about the Sugar Plum Princess, but finds barely any. He creates a rock giant to destroy the Nutcracker.
Clara, the Nutcracker, Major Mint and Captain Candy start their search the next day. They encounter some stepping stones and the Major crosses but he knocks the Captain off. Nutcracker saves the Captain and helps Clara cross. They then reach the Sea of Storms and Clara and Nutcracker go to find more supplies because Captain Candy lost his bag. Flower faeries help the pair find food, but the rock giant finds them and chases them. It destroys a boat the Major and Captain were building to cross the sea.
The snow faeries turn the sea into ice and the group go with Marzipan across. Nutcracker cracks the ice and the rock giant falls through. Pimm tells the king, and he makes another trap. Marzipan leads them to the Sugar Plum Princess’ island but the men are captured by bats. Clara is alone until the flower faeries bring a swing to carry her to the castle where the men are being held.
Clara sneaks past the Mouse King, who is building a bonfire in the castle courtyard. She comes to a dungeon and distracts its guards, but the dungeon is empty. Clara realises how unnatural it would be to post guards at an empty room and, using logical thinking, smashes the invisible barrier which was hiding her friends. The group confront the Mouse King and he prepares to shrink Clara again, but the Nutcracker deflects his spell and the Mouse King is shrunk to the size of a real mouse and flees into the sewers.
Clara kisses the Nutcracker and he transforms back into Prince Eric. Clara transforms into the Sugar Plum Princess and the palace transforms; the bonfire is replaced by a beautiful fountain. The Mouse King’s reign is officially over. The people of Parthenia all celebrate and dance, and Eric asks Clara if she will stay. She decides she will, but Pimm and the Mouse King fly by and snatch Clara’s necklace. They open it and she unwillingly returns home, just before Eric can declare his love for her. Fortunately, the Mouse King doesn’t enjoy his victory for long, as Pimm is afterwards knocked out by a snowball thrown by the Peppermint Girl, causing both villians to crash to the ground (presumably to their deaths).
Clara wakes up to find herself on her sofa with no nutcracker. No one believes what she says about the Nutcracker being a king, but her aunt comes in with a friend: Eric. He gives Clara her necklace and they dance. Barbie finishes the story there and she and Kelly perform the ballet steps perfectly.
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