Moralès and his soldiers pass the time watching the townspeople cross the public square. Micaëla enters, looking for Don José, a new corporal in the regiment, and is told to return later. Don José arrives at the changing of the guard. The nearby cigarette factory breaks, and all the men ogle the beautiful women who work inside, in particular the wild Romani girl, Carmen. While dancing the Habanera, she throws a flower to Don José.
Micaëla returns with a letter from Don José’s mother, and José tearfully remembers his former life. His mother advises him to return home, marry and settle down. There is a fight inside the factory between Carmen and another woman. Don José is ordered to sort out the situation. When Carmen shows her indifference to his authority, Zuniga decides to send her to prison and commands José to tie her hands. Quietly she persuades José to let her escape by promising an amorous rendezvous.
At Lillas Pastia’s tavern, soldiers watch the Romani dance. Near closing time, Zuniga flirts with Carmen, but is rebuffed. She learns José will be released from prison that evening — for letting Carmen get away he was forced to serve the sentence in her place. The famous bullfighter, Escamillo, enters amidst great excitement. He too is enamored with Carmen, but she decides to wait for José.
Pastia manages to clear the room of customers, and Dancaïre and Remendado gather with the women to plan their next smuggling run. Carmen stays behind, disclosing her newly found love for José. The soldier soon arrives, and Carmen dances for him alone. He professes his undying love — while imprisoned, he kept the flower she had thrown to him. They are interrupted by the bugle call, summoning José back to the barracks. Carmen pressures him not to leave, but they are interrupted by Zuniga, who has returned to pursue Carmen himself. Don José makes it clear that he is now an outlaw himself.
In the mountains, the smugglers rest after negotiating the harsh terrain. Don José has become disillusioned with life among the Romani and argues with Carmen. She suggests he return home, but José refuses. He is told to stand watch nearby. With friends Frasquita and Mercédès, Carmen reads her fortune in the cards and draws the Ace of Spades — the card of death.
Nearby, Micaëla has come in search of José with news that his mother is dying. Escamillo also appears, looking for Carmen. He and Don José begin to struggle, but the fight is broken up by the others. To finally be rid of him, Carmen commands José to go with Micaëla, but he will not be forgotten so easily, vowing to return.
Back in Seville, the townspeople bustle in anticipation of the upcoming bullfight. Escamillo again expresses his undying affection for Carmen, who now loves him in return. She is warned Don José is among the crowd. As the bullfight begins, she remains behind to tell him their affair is over. He is incapable of letting go.