Long ago in China, Li Mu Bai (CHOW YUN-FAT) is a martial arts master who has literally decided to hang up his sword, the 400-year-old Green Destiny, and has asked his longtime friend and associate, Yu Shu Lien (MICHELLE YEOH), to deliver it to Sir Te (LUNG SIHUNG), an elderly and respected leader in Beijing. Shu Lien is reluctant to do so, but finally agrees, while Li heads off to Wudan Mountain so that he can pay respects to his late master who was poisoned by a female assassin known as the Jade Fox (CHENG PEI PEI).
Arriving at Sir Te's home, Shu Lien meets Jen (ZHANG ZIYl) the apparently naïve but nevertheless aristocratic daughter of Governor Yu (LI FA ZENG), a prominent political figure. Jen isn't happy about her pending arranged marriage, and is fascinated and envious of Shu Lien's seemingly free life as a martial arts warrior.
That night, a masked figure steals the Green Destiny from Sir Te's compound, and despite the efforts of Shu Lien and Sir Te's chief security officer, Bo (GAO XIAN), to stop that, the thief gets away with the sword. An investigation gets under way and Police Inspector Tsai (WANG DE MING) and his daughter May (LI LI) believe the theft to be the work of none other than the Jade Fox.
Shu Lien has her own suspicions and begins to question Jen and test both her knowledge and abilities, stopping short of accusing her of the theft. Yet, as both Li and Jen's past lover, Lo (CHANG CHEN), arrive on the scene, the stage is set for surprising revelations and high octane martial arts battles as longtime grudges and fierce passions come to a head.