The film follows the overall story of the play, but cuts nearly half the dialogue, leaves out two major characters, and includes an opening voice-over that represents Hamlet's fundamental problem as indecision.

The film begins with a narrator (actually Olivier himself) quoting some of Hamlet's lines from Act I Scene IV:

So oft it chances in particular men,
That through some vicious mole of nature in them,
By the o'ergrowth of some complexion,
Oft breaking down the pales and forts of reason,
Or by some habit grown too much [this line is changed; Shakespeare's original line is or by some habit that too much o'erleavens the form of plausive manners[6]] ; that these men –
Carrying, I say, the stamp of one defect,
Their virtues else – be they as pure as grace,
Shall in the general censure take corruption,
From that particular fault...

Olivier then breaks from Shakespeare's words to inform us "This is the tragedy of a man who could not make up his mind."

The action begins on the battlements of Elsinore where a sentry, Francisco, (John Laurie) is relieved of his watch (and questioned if he has seen anything) by another sentry, Bernardo (Esmond Knight), who, with yet another sentry, Marcellus (Anthony Quayle), has twice previously seen the Ghost of King Hamlet. Marcellus then arrives with the sceptical Horatio (Norman Wooland), Prince Hamlet's friend. Suddenly, all three see the Ghost, and Horatio demands that the ghost speak. The ghost vanishes then, without a word.

Inside the Great Hall of the castle, the court is celebrating the marriage of Gertrude (Eileen Herlie) and King Claudius (Basil Sydney); old King Hamlet has died apparently of an accidental snakebite, and his wife, Gertrude, has, within a month of the tragedy, married the late King's brother. Prince Hamlet (Laurence Olivier) sits alone, refusing to join in the celebration, despite the protests of the new King. When the court has left the Great Hall, Hamlet fumes over the hasty marriage, muttering to himself the words "and yet, within a month!" Soon, Horatio and the sentries enter telling Hamlet of the ghostly apparition of his father. Hamlet proceeds to investigate, and upon arriving on the battlements, sees the ghost. Noting that the ghost beckons him forward, Hamlet follows it up onto a tower, wherein it reveals its identity as the Ghost of Hamlet's father. He tells Hamlet that he was murdered, who did it, and how it was done. The audience then sees the murder re-enacted in a flashback as the ghost describes the deed – Claudius is seen pouring poison into the late King Hamlet's ear, thereby killing him. Hamlet does not at first accept this as the truth, and then prepares to feign madness, so as to test Claudius' conscience, without jumping to conclusions.

This feigned insanity attracts the attention of Polonius (Felix Aylmer) who is completely convinced that Hamlet has gone mad. Polonius pushes this point with the King, claiming that it is derived from Hamlet's love for Ophelia (Jean Simmons), Polonius's daughter. Claudius, however, is not fully convinced, and has Polonius set up a meeting between Hamlet and Ophelia. Hamlet's "madness" is constant even in this exchange, and Claudius is convinced.

Hamlet then hires a group of wandering stage performers, requesting that they enact the play The Murder of Gonzago for the king. However, Hamlet makes a few alterations to the play, so as to make it mirror the circumstances of the late King's murder. Claudius, unable to endure the play, calls out for light, and retires to his room. Hamlet is now convinced of Claudius' treachery. He finds Claudius alone, and has ample opportunity to kill the villain. However, at this time, Claudius is praying, and Hamlet does not seek to send him to heaven, so, he waits, and bides his time.

He instead confronts Gertrude about the matter of his father's death and Claudius' treachery. During this confrontation, he hears a voice from the arras, and, believing that it was Claudius eavesdropping, plunges his dagger into the curtains. On discovering that he has in fact, killed the eavesdropping Polonius instead, Hamlet is only mildly upset, and he continues to confront his mother. He then sees the ghostly apparition of his father, and proceeds to converse with it (the Ghost is uncredited in the film, but is apparently voiced by Olivier himself). Gertrude, who cannot see the ghost, is now also convinced that Hamlet is mad.

Hamlet is deported to England by Claudius, who has given orders for him to be killed once he reaches there. Fortunately, Hamlet's ship is attacked by pirates, and he is returned to Denmark. In his absence, however, Ophelia goes mad over Hamlet's rejection and the idea that her own sweetheart has killed her father, and she drowns, supposedly committing suicide. Laertes (Terence Morgan), Ophelia's brother, is driven to avenge her death, as well as his father's.

Claudius and Laertes learn of Hamlet's return and prepare to have him killed. However, they plan to make it look like an accident. Claudius orders Laertes to challenge Hamlet to a duel, wherein Laertes will be given a poisoned blade that will kill with a bare touch. In case Laertes is unable to hit Hamlet, Claudius also prepares a poisoned drink.

Hamlet meets Laertes' challenge and engages him in a duel. Hamlet wins the first two rounds, and Gertrude drinks from the cup, suspecting that it is poisoned. Whilst in-between bouts, Laertes rushes Hamlet and strikes him on the arm, fatally poisoning him. Hamlet, not knowing this, continues to duel. Hamlet eventually disarms Laertes and switches blades with him. Hamlet then strikes Laertes in the wrist, fatally wounding him. Gertrude then submits to the poison and dies, warning Hamlet not to drink from the cup. (Olivier thus makes Gertrude's death a virtual suicide to protect her son, while Shakespeare writes it as if it were purely accidental, with Gertrude having no idea that the cup is poisoned.) Laertes, dying, confesses the whole plot to Hamlet, who flies at Claudius in a fit of rage, killing him, before finally expiring himself. Horatio, horrified by all this, orders that Hamlet be given a decent funeral, and the young prince's body is taken away, while the Danish court kneels and the cannons of Elsinore fire off a peal of ordnance in respect. (A few women can be seen weeping quietly in the background.)
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