Barbie tells Kelly the story of a little nutcracker given to a kind and clever girl named Clara. Even though the Nutcracker is only made of wood and not much to look at, Clara loves him dearly and holds him in her arms as she falls asleep under the Christmas tree. Her pleasant dreams are interrupted by the invasion of the Mouse King and his army. Clara's Nutcracker valiantly tries to defend her but in the battle the Mouse King shrinks Clara down to no taller than a mouse. Now Clara and the Nutcracker, who was also been cursed by the Mouse King's magic, must go in search of the Sugar Plum Princess--the only person who can set things right.