The film tells the story of FernGully, a rainforest near Mount Warning, Australia. A curious and mischievous fairy girl named Crysta sees a part of the world she has never seen before beyond the rainforest and believes humans dwell only on the nearby mountain. But the wise sprite of the forest and Crysta's mother figure, Magi Lune, says humans are extinct. In the opening scene, she says that they fled, driven away by the attack of an enemy known as Hexxus, the spirit of destruction and all that is toxic to nature, never to return and presumed dead; Hexxus was defeated by the fairies and imprisoned inside a tree. Crysta mentions a cloud that she saw rising near the mountain, and Magi Lune identifies it as smoke, but dismisses Crysta's speculation that the smoke might be Hexxus, saying "There isn't a force in nature that could release him, and there are no poisons here on which he can feed. Hexxus is trapped for all time."
She then meets and befriends the TARDIS Team along with a a mentally unstable yet comical fruit bat named Batty Koda that was experimented on by humans and now has wires and antennas fused into his head, Crysta heads into the unknown where she finds dead trees all marked with red aerosol paint crosses, which mark them for cutting. She finds male humans, and accidentally shrinks one named Zak in trying to prevent him being crushed by a tree.
Zak goes on a wild adventure with Crysta, Batty, Doctor Aaron and Cynder, nearly getting eaten by the lizard Goanna, and unexpectedly falls in love with Crysta. Meanwhile, Zak's superiors cut down an enchanted baobab tree that Zak had accidentally marked while trying to use his paint can like bug spray. Which so happens to be apart of an evil plan orchestrated by Ganondorf, Myotismon, The Grand Duke of Owls, and Mumm-Ra as this turns out to be the tree Hexxus is trapped in, and the cutting down and processing of the tree by the lumbermill-like leveller machine releases him. Determined to get revenge upon the fairies of Fern Gully (specifically Magi Lune) for imprisoning him , Hexxus apparently gains power from pollution, specifically the energy and smoke produced by the Leveler, as he can be seen "drinking" from it like a liquid. Hexxus manipulates the lumberjacks and their tree leveler into tearing down the rainforest in the direction of the fairies by the next morning, thereby destroying the very fabric of their world. He does this under the vocal guise of their boss.
Up until this point, all the fairies haven't had a clue as to what danger awaits them. That is until Zak tells the truth about who he is and what the humans are doing in FernGully.
Once the truth is revealed the fairies all join forces and fuse their powers together, creating a protective tree cage. Magi sacrifices herself (giving her power to the fairies and even Zak) and it is up to Crysta and the other fairies to defeat Hexxus and the villains. Zak turns off the leveler, causing Hexxus to lose the energy he was gaining from it and disappear, but he soon rips out of the machine as a giant demonic skeleton creature made of oil that breathes fire. Crysta seemingly sacrifices herself like Magi did by allowing Hexxus to devour her in one bite, and uses her powers from inside him to grow a seed she had with her to again imprison Hexxus (together with the leveler) inside a new tree with help from the fairies led by Pips, thereby imprisoning him again forceing Ganondorf, Myotismon, The Grand Duke of Owls, and Mumm-Ra to retreat. Crysta then emerges from the tree, unharmed and alive, from a flower soon after. Crysta sadly resizes Zak to normal size and he sets off with his fellow lumberjacks, Tony and Ralph, to try to stop the destruction of the rainforests. Meanwhile, Crysta takes Magi's place after learning finally how to control her powers. Doctor Aaron and Cynder with Batty Koda joining them, bid her farewell depart from FernGully in the TARDIS.