Jesse Aarons Jr., the only boy in a family of five children, is a middle child, living in rural southwest Virginia. His mother favors his sisters Brenda, Ellie, May Belle, and Joyce Ann, while his father works in Washington D.C. and therefore spends little time with his children. May Belle, the second youngest sister, adores Jesse and admires him. Leslie Burke is an only child who moves from Arlington, VA to the same area as Jesse, along with her wealthy parents, who are both writers.

Jesse and Leslie soon become close friends. Jesse shares his secret love of drawing with Leslie, where as Leslie shares with Jesse her love of fantasy stories. With this new friendship, the two children create an imaginary kingdom in the woods near their homes, accessible only by a rope swing over a creek. They create the imaginary kingdom of Terabithia of which they name themselves King and Queen, and they spend every day after school there. In Terabithia, they are able to face their fears of the real world, such as of the seventh grade bully Janice Avery.

Leslie gives Jess a drawing pad and a set of watercolors as a birthday present and Jess gives Leslie a dog whom she named Prince Terrien, or "P.T." for short, as a Christmas present.

Jesse has a crush on his young music teacher, Miss Edmunds, and would do anything to be with her. The central crisis occurs when Jesse accompanies Miss Edmunds to the National Gallery of Art in Washington D.C., and Leslie goes to Terabithia alone. The rope breaks as she is swinging over the rain-swollen creek. Though a good swimmer, Leslie falls into the creek and drowns. Jesse can overcome his grief only with the strength and courage that his friendship with Leslie had given him.

Jesse attempts to deal with his grief by going back to Terabithia alone to make a memorial wreath for Leslie. During his ceremony, he hears a cry for help and finds his younger sister, May Belle, caught in the midst of a fallen tree that she had been trying to use as a bridge across the creek. He helps her out of danger and rescues her.

Leslie's grief-stricken parents decide later to leave the area. As Mr. and Mrs. Burke are leaving, Jesse asks to take some of their wooden planks by their shed. They say he may have anything left in the house; thus permitted, he goes down to Terabithia to build a bridge. After he finishes the bridge he takes May Belle over it, and makes her the Queen of Terabithia.