12-year-old orphan Anne Shirley is living in servitude with the cruel Hammond family in Nova Scotia. When Mr. Hammond dies, his wife sends Anne back to the orphanage. After six months, she receives the news that she has been adopted by a family in Prince Edward Island. Upon arriving in the small town of Avonlea, Anne is met at the train station by the elderly Matthew Cuthbert, who is surprised to find her there. Matthew and his sister Marilla had requested a boy to help them on their farm, Green Gables, but Anne was sent due to a miscommunication.

Although Matthew takes a liking to Anne, Marilla refuses to keep her, saying a girl is no of use to them. However, she has a change of heart when she finds out Anne would be sent to live with the unpleasant Mrs. Blewett. Marilla decides to put Anne "on trial" before making up her mind. Anne is delighted, but soon finds herself in trouble with Marilla's friend and the local gossip Rachel Lynde, who criticizes her looks and red hair. Anne loses her temper at Rachel and refuses to apologize. Matthew is able to convince Anne to do so, as he wants her to stay at Green Gables. Rachel accepts Anne's apology and suggests to Marilla that Anne attend a Sunday School picnic so she can make friends.

At the picnic, Anne becomes "bosom" friends with Diana Barry from across the pond. They compete in a three-legged race where Anne meets Gilbert Blythe, who immediately shows interest in her. At school, Gilbert (trying to get Anne's attention) makes fun of Anne's red hair, calling her "Carrots", and she angrily smashes a slate over his head. She vows never to forgive him and tries to salvage her wounded pride by dying her hair black, but it instead turns green. After finding out that Gilbert was the boy whom Anne hit, Marilla decides that Anne will stay at Green Gables. Anne is overjoyed, and later finds out from Diana that Marilla was previously engaged to be married but after a quarrel she has had to live with her brother, having been thwarted in love.

Anne and Gilbert soon find themselves competing for first in academics. Anne's impulsiveness continues to get her into scrapes, but she remains close friends with Diana. That all changes when Anne accidentally serves currant wine instead of raspberry cordial at a tea party and gets Diana drunk. Mrs. Barry thinks it was intentional and forbids Anne and Diana from seeing each other again. Meanwhile, Miss Muriel Stacey becomes the new Avonlea school teacher and Anne discovers a kindred spirit in her. Miss Stacey pays a visit to Green Gables one day and requests that Anne join a special class for students who plan to take the entrance exam for Queen's Academy in Charlottetown.

While Marilla is away from Green Gables, Diana arrives in a panic and tells Anne and Matthew that her little sister Minnie May is sick with croup. Matthew goes for a doctor while Anne, having prior experience with the illness, treats the girl with ipecac and saves her life. Mrs. Barry is grateful to Anne for saving her child and invites her to a Christmas ball in Carmody overnight. Anne sees Gilbert at the dance but is not willing to befriend him; he wounds her pride by snubbing her but secretly steals her dance card. She also meets Aunt Josephine Barry, a cranky old woman who proves to be another kindred spirit. Anne promises to visit Aunt Josephine in Charlottetown, where she will take the Queen's entrance exam. She finds comfort in the idea of beating Gilbert for first place.

Back in Avonlea, Anne and her friends recreate Alfred Tennyson's The Lady of Shalott, with Anne playing the role of Elaine the Lily Maid. While floating down the river, her boat springs a leak and sinks, leaving Anne helplessly clinging to a bridge. Gilbert comes rowing by and rescues her, then he tells her they have tied for first place on the exam. He also asks her to forgive him for what he said about her looks and insists he wants to be her friend, but Anne still has some reservations.

One day, Gilbert offers Anne a ride home. He wants to escort Anne to a concert at White Sands, where she will be giving a recitation. Anne accepts his invitation, but does not realize Rachel Lynde spied them together. Rachel tells this to Marilla, who refuses to let Anne fall in love with Gilbert and believes she should continue with her education. Anne insists she and Gilbert are merely friends, and Matthew agrees that she has done nothing wrong. Marilla apologizes and admits that Anne has grown so much and does not belong in Avonlea anymore and will soon be going out into the world her own way. Anne states that no matter what, she will always be Anne of Green Gables.

Anne instead goes to White Sands with the Barry family. Gilbert attends the concert to see Anne recite from Alfred Noyes's The Highwayman. Anne is a success and everyone congratulates her, although she does not get a chance to talk with Gilbert afterwards. Anne heads off to Charlottetown to continue her education at Queen's and obtain a teacher's license. She finds out that the graduate who receives the highest mark in English literature wins the Avery scholarship, $250 for four years, which she plans to use to get an arts degree at Redmond College. When the results come in, Anne is the winner of the scholarship.

After returning to Avonlea, Diana reveals to Anne that Gilbert's father cannot afford to send him to college, so he will be teaching at the Avonlea school to earn his way. Afterwards, Matthew dies, which forces Marilla to consider selling Green Gables since her eyesight is failing and she may go blind. However, Anne reveals that she has decided to decline the Avery scholarship. Instead of going to Redmond, she will study by correspondence while teaching at the school in Carmody. Marilla is hesitant at first but gratefully agrees, and reveals that Gilbert's father was her old beau with whom she quarreled, and she wishes she had forgiven him when she had the chance. Later, Gilbert reveals that he spoke to the trustees to let Anne have the Avonlea school in exchange for Gilbert teaching at Carmody, so Anne can stay at Green Gables and help Marilla. He will also be taking courses by correspondence and asks for Anne's help in studying. The two friends make up for good and Gilbert walks Anne home.