Vienna, 1860s. In the Waldners' hotel suite, Countess Adelaide von Waldner consults a Fortuneteller on the financial crisis in her family. As they examine the cards, "Zdenko," the Waldners' "son" -- actually their younger daughter, Zdenka, reared as a boy to save the expense of bringing up a second girl -- is kept busy warding off creditors. The Fortuneteller predicts a rich marriage for Arabella, beautiful elder daughter of the Waldners. When the older women retire, Zdenka listens to the impassioned pleas of a young officer, Matteo, who asks for help in his courtship of Arabella. He threatens to shoot himself if he cannot rely on his friend "Zdenko." No sooner has he dashed away than Arabella returns from a stroll. Dismissing her companion, she finds gifts from three other suitors, Counts Elemer, Dominik and Lamoral. Though Zdenka secretly loves Matteo, she implores her sister to favor him. Arabella replies that the right man for her has not yet appeared. Elemer arrives to invite Arabella for a sleigh ride. She accepts and goes off to change, not before pointing out to her sister a stranger standing in the street below, looking for her window. Count Waldner saunters in, disgusted with his bad luck at cards and his many bills. As a last resort, he tells his wife, he has sent a photograph of Arabella to a rich old friend and fellow officer, Mandryka. A few moments later, the latter's nephew, also called Mandryka, is announced. The young man has read Waldner's letter, fallen in love with Arabella's picture and journeyed to Vienna in his deceased uncle's place to ask her hand in marriage. Describing his rich estates in Slavonia, he lends Waldner money. As soon as the room is deserted, Arabella reappears, in a melancholy mood. She asks herself why she is so dissatisfied with her suitors. Her thoughts soon turn to the Coachman's Ball, which she will attend that evening. When Zdenka joins her, the two sisters go off to their sleigh ride.
By the grand staircase in the foyer of a public ballroom, Waldner introduces Mandryka to the Countess and Arabella, who recognizes him as the stranger she saw outside the hotel and is overcome with emotion. When they are left alone, Mandryka, also deeply attracted, tells of his young wife who died, of his lands and the Slavonian custom of pledging troth with a glass of water. Arabella returns his declaration of love but asks to say farewell to her girlhood. The coachmen's mascot, Fiakermilli, names Arabella queen of the ball. Elated, Mandryka orders flowers and champagne for everyone but steps aside so Arabella may bid farewell to her suitors Dominik, Elemer and finally Lamoral. As the girl waltzes through the room, she does not notice Matteo, who pleads desperately with Zdenka for some sign of Arabella's professed love. Zdenka presses a key into his hand, telling him it is from Arabella and unlocks the latter's bedroom. Mandryka, overhearing, is appalled. Furious, he drinks recklessly and flirts with Fiakermilli and the Countess until Waldner brings him to his senses by suggesting they return to the hotel.
Unaware that Matteo has spent an hour in her room upstairs, Arabella returns from the ball, softly repeating to herself Mandryka's description of his country home. Matteo, trying to leave unnoticed, is amazed to find Arabella in the lobby and cannot understand her cool cordiality, since he believes her to have been in his arms shortly before. Mandryka arrives with the Waldners and, thinking Arabella faithless, provokes Waldner to demand satisfaction. A duel is averted when Zdenka runs downstairs in flowing negligee, confessing she gave herself to Matteo to avert his suicide. Overcome with shame, she threatens suicide herself but is forgiven by her parents and embraced by Matteo. As the others go to their quarters, Arabella bids Mandryka send his servant to her room with a glass of water. He does so and stands in the lobby, wondering how she feels toward him now. Arabella appears at the top of the stairs, water glass in hand, to plight her troth with him anew.