Horace B. Otis, a wealthy American, purchases Canterville Chase, an ancient English manor-house, despite warnings that the house is known to be haunted. He moves into the house accompanied by his wife, his eldest son Washington, his daughter Virginia, and his two younger twin sons. Immediately upon arrival, the family is confronted by a bloodstain in a sitting room. The housekeeper, Mrs. Umney, explains that the stain has been there since 1575 and is the result of Lady Eleanore de Canterville having been brutally murdered by her husband, Sir Simon de Canterville.
The Otis family takes a pragmatic perspective and scrubs the stain away; they repeat the process when the stain continues to reappear every morning. The stubborn reappearance of the stain, as well as other strange occurrences around the house, leads them to consider that the rumor of the ghost may not be totally unfounded. These ideas are confirmed when one night, the sound of clanking chains wakes Mr Otis from his sleep. He gets out of bed and confronts a terrifying ghost, but responds only by recommending that the ghost oil his chains so that he does not cause so much noise when he is walking around at night.
Mr. Otis is not the only family member who is not afraid of the ghost: the young twins enjoy tormenting the ghost with pranks. The ghost is very proud of his tradition of terrifying visitors for hundreds of years, and he is determined to strike fear into the American family. However, the more and more terrifying he tries to be, the more they either make fun of or ignore him. Things hit rock bottom for the Canterville Ghost when the twins actually create a fake ghost of their own to scare the real ghost. He accepts that he has lost his status and power, and he begins to become depressed and pine away.
Meanwhile, Virginia's beauty has attracted the attention of the young Duke of Cheshire, who comes to stay at Canterville Chase. While he is visiting, Virginia unexpectedly comes across the secret hiding lair of the ghost. The ghost explains his sadness and suffering, telling her that he longs for the peaceful experience of death. He also tells her that because of her purity and innocence, she can help him to achieve this peace. Even though she is frightened, Virginia agrees to help; the two of them pass through a secret opening in the wall and vanish.
When Virginia cannot be found, her family and the Duke become very upset. A few hours later, Virginia appears in the dark at the top of the stairs. Her only explanation of her disappearance is that she has assisted in finally bringing eternal rest to the Canterville Ghost. As a token of his thanks and affection, Sir Simon has given her a box filled with jewels. Virginia leads the family into a secret chamber, where they are greeted by the sight of his skeletal remains. Four days later, Sir Simon’s body is finally laid to rest with a proper burial.
Virginia subsequently marries the Duke of Cheshire. Although she never tells anyone what she experienced when she vanished with the Ghost, she always reflects affectionately on him and his memory.