Don Diego de la Vega, a wealthy young caballero, is set away from his California home by his father, Don Alejandro, to school in Barcelona. He is forced to leave his childhood love Luisa, who is also being sent away by Diego's father. At the same time, Don Alejandro announces that Diego and Luisa's childhood friend Ramon shall become captain of the army, which pleases both Diego and Luisa.
Later, in Barcelona, Diego has run away from school and joined a band of Gypsies who perform in the backstreets of the city. He is their star attraction, and after showing several tricks to an enthralled audience, he sees Luisa. Luisa persuades Diego to return to California to stop Ramon, who has become a tyrant. Inez, another gypsy, and evidently Diego's lover, is not pleased to see Luisa and decides that she and all the other gypsies must accompany them. In California, Diego finds that Ramon has stripped the people of their rights and has put himself in charge ever since Don Alejandro "died". However, Don Alejandro is not dead and is being held captive by Ramon.
After witnessing the cruelty of his old friend, and with the help of Inez (the only one who knows his true identity) Diego adopts a heroic alter ego, Zorro, to defend the people of the pueblo. At the same time, to keep his identity secret he presents himself to Ramon as an idiot of no real threat. He offers himself to Ramon as a personal servant, a move that angers Luisa, who believes that she brought Diego back for nothing. Zorro makes a name for himself by saving three men sentenced to hanging for adding rocks to their sacks of food to gain extra money for their families. Zorro swings in spectacularly out of nowhere and managing to appear almost simultaneously as Zorro and Diego, so that no one will suspect Diego. After another spectacular rescue, Zorro flees from Ramon's guards and find himself in Luisa's bathroom, having walked in on her whilst in the bath. Embarrassed, he lets it slip that he knows her name, but his identity is kept safe from her, and she begins to fall in love with Zorro, just as Diego has always been in love with her.
Meanwhile, the gypsies cause a stir in the pueblo by drinking and dancing together, enticing Ramon's cowardly but warm hearted servant Garcia. Flirting and joking with Garcia, Inez soon finds a new admirer, and Garcia tries his best to act strong and brave like Zorro. But Inez still has eyes for Diego and finds Garcia meerly entertaining. Ramon, initially intrigued by the idea of free wine, eventually turns against the gypsies and their radical ways and trys to prevent their activities. He finally attempts to exert his power by forcing himself upon Luisa, the woman he lusts over, but who hates everything that he has become. However, Zorro appears just in time to save Luisa. He forces Ramon to his knees and carves his mark, "Z" into Ramon's chest, as Ramon screams in agony and anger.
Ramon reveals the full extent of his injury. He is permanently branded with the mark of Zorro. The gypsies and citizens mock him, and he angrily declares a curfew and that anyone out after the curfew will be shot. The crowd protests ("Freedom"). Inez tells Luisa that it is too dangerous for her. Luisa says that she knows a place where Ramon can never find her. Ramon orders the guards to shoot into the crowd. The people flee leaving Inez and Ramon alone. She tells Ramon that his empire is crumbling around him and that soon his greed will consume him ("Bamboleo" reprise). Ramon leaves in denial, but her words have a great effect on him. Diego tries to advise Garcia on how to express his love for Inez, but when she arrives, Garcia becomes embarrassed and runs off. Diego inqures about Luisa's whereabouts. Inez tells him and also admits that she understands that Diego loves Luisa. Diego (dressed as Zorro) finds the cave where Luisa is hiding. He kisses Luisa only to pull away. Luisa asks him why he is so afraid of his feelings ("A Love We'll Never Live").
The following day Garcia tries to impress Inez ("One more beer"). Ramon, still distressed by Inez's words goes to confession, but he soon notices the priest is actually Zorro who is trying to find Don Alejandro. He sets a trap for Zorro, but Zorro manages to escape. Luisa goes to the gypsy camp where Inez transforms her into a gypsy ("Djobi Djobai"). Ramon bursts in and arrests Luisa. Inez calls Garcia a coward because he does nothing to stop Ramon. Luisa is about to be shot when Zorro accompanied by several other men dressed as Zorro, fights off the guards. Ramon puts a knife to Inez's throat and tries to make Zorro choose between Luisa and Inez, but Inez throws Ramon to the ground. She tells Ramon that the love between Zorro and Luisa is a love that he can never know. Ramon produces a pistol from his pocket and shoots Inez. A heartbroken Zorro surrenders and is dragged away by the guards as Ramon forces Luisa to agree to marry him. As Ramon leaves with Luisa, the gypsies appear and begin to mourn as they carry Inez's body away.
In his prison cell Diego laments his failure to protect the people and blames himself for the suffering of the ones he loves ("Hope" Reprise). Garcia arrives and, admitting his cowardice, tells Zorro that he can take him to Don Alejandro. Meanwhile, Luisa is dressed by attendents for her wedding to Ramon. She wishes that she could have known the true identity of Zorro ("The Man Behind the Mask"). As the wedding begins, Zorro arrives, but this Zorro is revealed to be Don Alejandro, who confronts Ramno about his cruelty. The guards now turn against Ramon, and Don Alejandro orders Ramon to be arrested. But Ramon says that if they dare to arrest him, he will kill Luisa.
The wedding proceeds, but just before Luisa gives her vows, Zorro swings into the chapel. During the ensuing sword fight with Ramon, Zorro reveals his true idenity to Ramon and ask him to stop fighting, saying that they are brothers. Ramon appears to agree but then draws a small knife. Diego evades the blade and causes Ramon to fall on his own knife, fatally wounded. Diego is distressed by what he has done, when Luisa and Don Alejandro reenter the room. Lusia is shocked by the discovery that Zorro is Diego but still declares that she loves him. The two kiss and embrace. All rejoice ("Fiesta").