Film begins with a peddler singing Arabian Nights while riding a camel and tells about the story of Aladdin. On a dark night, when Jafar, the Grand Vizier to the Sultan of Agrabah, attempts to access the Cave of Wonders, a magical cave which holds treasures beyond the wildest belief -- above all is a magical oil lamp containing a genie is hidden. He and his talking parrot, Iago, learn that the only one who can enter the Cave of Wonders is the metaphorical "Diamond in the Rough".

Meanwhile, in the palace of Agrabah, Jasmine, the beautiful teenage daughter of the Sultan, must be married before her upcoming birthday, but she rejects every prince she meets, as she wants to be married for true love and not merely for wealth. Later, Jasmine, frustrated with "having her life lived for her," climbs over the palace walls, and sees the marketplace for the first time, where she meets the street urchin Aladdin and his monkey, Abu, and the two young people are seen to be falling for each other. Jafar uses a machine to see that the "diamond in the rough" is Aladdin. Jafar sends a group of guards to capture Aladdin while Jasmine is still with him. Jasmine tells Jafar to release him, but Jafar lies and tells her he is already dead.

When Aladdin awakens, Abu gives him the lamp which he had snatched from Jafar. After rubbing it, a genie is unleashed, revealing that he will grant Aladdin three wishes. Aladdin dupes the genie into freeing them from the cave without using up a wish. Jafar, having lost the lamp, plans to trick the Sultan into marrying him forcefully to Jasmine, then kill off both of them before Jasmine becomes Queen and executes both Jafar and Iago for no reason.

While contemplating his wishes, Aladdin asks for the genie's opinion. The genie admits he would wish for freedom, since he is a prisoner to his lamp and must follow the orders of the lamp's master. Aladdin promises to wish him free with his last wish. Happily, the genie grants Aladdin his first wish: making him a prince so he can marry Jasmine. They parade to the Sultan's palace, much to Jafar's dismay, but Jasmine initially rejects "Prince Ali" considering him a buffoon like all the others before him. Later that night, Aladdin meets Jasmine, and takes her on a magic carpet ride through the sky. She soon realizes that he is the same boy she met in the streets and that he has lied to her. Aladdin comes up with a story that he sometimes dressed as a "commoner" to escape the pressures of palace life, and she believes him. Aladdin returns her home and they kiss.