Napoli

Act I (The Market). Teresina's mother Veronica, who does not want her to marry poor Gennaro, introduces her to two other suiters. These are two older, but, rich men named Peppo and Giacamo. Teresina, much to her mother's distress, refuses them both and instead goes off to wait for Gennaro. When Gennaro arrives back at port, he and Teresina go to find Veronica and try to convince her that they should wed. Luckily for them, this task proves relatively easy once she sees how true the young couple's love is. Full of happiness Teresina and Gennaro sail off together.

Meanwhile a group of entertainers come and put on a show for the townsfolk. However, a violent storm begins and the festivities come to an abrupt end. When the storm ends, Gennaro is found, but Teresina is not. Thinking she has drowned, Veronica openly mourns for her daughter and blames Gennaro for her death. So stricken by this turn of events Gennaro becomes so agitated that he almost commits suicide, but stops when he sees a statue of the Madonna. Soon Fra Ambrosio, the local monk, appears and gives him a picture of the Madonna telling him to go and find Teresina.

Act II (The Blue Grotto). Gennaro looks everywhere for Teresina and eventually finding her in The Blue Grotto, a magical place ruled by Golfo who has turned Teresina into a Naiad (Fairy of the Sea). Because of the Transformation, Teresina no longer remembers Gennaro. However, through faith, Teresina is changed back into a human and has her memory restored. Quickly, Gennaro and Teresina leave the Grotto to return to Naples.

Act III (The Wedding). When Teresina and Gennaro return the townsfolk are suspicious because they had thought Teresina was dead. Peppo and Giacamo even try to convince everyone that Gennaro is in league with the devil. This rumor is soon disproved and the wedding celebration begins.