Off the coast of Cape Cod, Massachusetts, eight-year-old Allen Bauer jumps from the deck of a tour boat after spotting something in the water. While submerged, he sees a mermaid about his age. They hold hands, but a rescuer pulls Allen away. Twenty years later in New York City, an adult Allen manages his family’s produce business with his shiftless older brother, Freddie Bauer. At the office, Allen gets a telephone call from his girl friend, Victoria, informing him that she is moving out of their apartment. The following day, at the wedding of the Bauers’ employee, Jerry, Allen laments that Victoria left because he did not love her. After the ceremony, Allen becomes intoxicated, decides he is going to die alone, and impulsively takes a taxicab to Cape Cod. The following morning, on the beach, a scientist named Walter Kornbluth and two assistants unpack research equipment. When Allen asks for a ride to an island, Kornbluth accuses him of being a spy. Later, a man named Fat Jack takes Allen to the island in a small boat. Allen confides that he cannot swim, and Fat Jack rocks the boat to scare him, inadvertently killing the engine. After Fat Jack swims to get another boat, Allen tries to restart the engine, but falls into the water and is knocked unconscious. As he sinks, he loses his wallet, and a pair of arms reach out for him. Later, he awakens on the beach and sees a beautiful naked woman who kisses him passionately then dives into the ocean and disappears. Unseen by Allen, the woman transforms into a mermaid and finds his wallet. She startles Kornbluth, who is diving nearby, and he drops his camera before he can photograph her. The mermaid swims to a sunken ship and, using the address from Allen’s driver’s license, locates New York City on a map. Later, the mermaid takes human form and causes a commotion at the Statue of Liberty. Wearing only a necklace and unable to speak English, police take her into custody and telephone Allen, who picks her up and takes her home. Arriving at his apartment building, they make love in the elevator. In the afternoon, Allen returns to work and leaves the mermaid with the television for company. Borrowing one of Allen’s suits and armed with a single word of English, “Bloomingdale’s,” the mermaid heads outside and the doorman, Timmy, puts her in a taxicab to the department store. There she uses Allen’s credit card to go on a shopping spree, and spends six hours watching television in the appliance department. Tipped off by Timmy, Allen goes to Bloomingdale’s and is surprised that the mermaid has apparently learned to speak English in one day. She attempts to tell Allen her name in her native language and the high-pitched screech she emits shatters all the television screens in the store. Allen tells her he needs a name he can pronounce, and she chooses “Madison” after the New York City avenue. Madison reveals that she can only remain in the city for six days, and Allen assumes she has an immigration problem. That night, while Allen sleeps, Madison sneaks into the bathroom, takes a saltwater bath, and her legs transform into a tail. Allen awakens and surprises her, so she hurriedly dries her body behind the locked door. When he breaks through, her legs have returned, and she claims that she did not let him in because she was shy. Meanwhile, the scientist, Kornbluth, searches Cape Cod in vain for the mermaid, until he spots Madison’s appearance at the Statue of Liberty on the cover of a tabloid newspaper. Back in New York City, Allen shows Madison a mermaid-themed fountain and she asks if he likes it. He says that he does and it reminds him of a childhood accident, but stops short of revealing that he saw a mermaid. Sadly, he tells her, the fountain is being removed to make way for condominiums. The following day, Allen tells Freddie that he wants to take Madison to a dinner where the President of the United States of America will speak, and Freddie accuses him of being in love. At the Museum of Natural History, Kornbluth is humiliated when he attempts to present his research on mermaids to his peers, led by Dr. Ross. Allen returns home and finds that Madison had the mermaid fountain installed in his living room. She tells him that she traded her necklace for the fountain because she loves him. Elsewhere, Kornbluth’s mentor, Dr. Zidell, tries to reason with him, but Kornbluth insists there is a mermaid in New York City and he plans to prove it. Kornbluth locates Allen and Madison out walking and follows them with two buckets of water. He throws the water at the wrong woman, and her companion beats him. Meanwhile, Allen and Madison have a romantic dinner and ice skate, and Allen suggests they could solve her immigration problem if they got married. When she responds that she cannot marry him, but will not reveal why, Allen treats her coldly, and she runs off. A rainstorm strikes and Allen searches for Madison as she hides under a bridge. In the morning, Madison finds Allen at the produce company, and agrees to marry him. Kornbluth, with a broken arm and wearing a neck brace, impersonates a maintenance worker, and attempts to ambush Madison and Allen, but accidentally soaks the same couple he clashed with earlier, and is thrown down a flight of stairs. Later, Kornbluth infiltrates the dinner for the president dressed as a waiter, but is apprehended by the Secret Service. As he is escorted outside, Kornbluth manages to wet Madison with a hose and her legs turn into a tail, exposing her secret. Authorities whisk her and Allen to a research facility supervised by Dr. Ross. Allen is placed in a tank of water for twelve hours and studied before being released. When Allen feels sorry for himself, Freddie chastises him that most people never experience the happiness Allen felt for a short time. At the research facility, Kornbluth notices Madison’s fading health and challenges Ross’s treatment of her. Allen confronts Kornbluth, who admits he did not consider the consequences of his actions but offers to get Allen in to see Madison. Dressed in lab coats and impersonating Swedish scientists, Allen and Freddie join Kornbluth and gain access to the facility. Allen and Kornbluth smuggle Madison out in Allen’s car and take her to the river as Freddie remains in the laboratory. When the authorities realize Madison is missing, the military is ordered to pursue them. Kornbluth acts as a diversion as Allen and Madison reach the docks. The military bears down on them, and Madison reminds Allen of the time he fell in the water twenty years earlier and says that he felt safe because he was with her. Allen wants to join her, but she warns him that he will never be able to return to his world. Brokenhearted, he says goodbye, and Madison dives into the river. As military frogmen drop into the water from helicopters, Allen changes his mind and leaps into the river. They fight off the divers and swim to Madison’s home at the bottom of the ocean.