Jess Aarons is an eleven-year-old boy living in a rural area of the South who loves to run. He dreams of being the fastest boy in the fifth grade when school starts up in the fall, feeling that this will for once give him a chance to stand in the spotlight among his five sisters, and might win him the attention of his preoccupied father. Jess is quite insecure in his identity. He loves to paint and draw, but he knows very well that this labels him a "sissy" in the eyes of most of the world, particularly his father. In addition, his family is stretched so tight by poverty that he has little chance to really explore his own identity during this crucial period of adolescence. He has therefore built up the importance of winning in his mind, feeling that here, at least, is something that he is good at which won't win him an undesired label of "sissy" or "girl" in the eyes of his father or schoolmates, and which will allow him to shine in his own right. He practices each morning, always dreaming of his upcoming victory. However, when the races come around at recess, a new girl, Leslie Burke, who just moved next door to Jess, boldly crosses to the boys' side of the playground and beats everyone.

A rather unpromising beginning, but Jess and Leslie become fast friends. They build a secret fantasyland across the creek in the woods, called Terabithia, where they play all the time. There they forget the rest of the world, such as the kids at school or Jess's less-than-satisfactory family. The time they spend in Terabithia, in fact, seems to strengthen them for these trials of everyday life: it is there that they map out a plan of revenge on the school bully when she steals May Belle's Twinkies, and it is there that they discuss Jess's feelings of insecurity when Leslie begins to draw closer to her father. Leslie also introduces Jess to the world of imagination and creativity, telling him the stories of such classics of literature as Moby Dick and Hamlet . All this also strengthens Jess's artistic talent and ability, as Leslie supports his ambition and, through the stories she tells, provides him with great subject matter. But much of the time they play wonderful games of their own invention—defeating intruders on Terabithian territory, praying to the Spirits of the Grove to end a long spell of rain, and numerous other fantasies.

However, Jess and Leslie's friendship, though centered in Terabithia, is not limited to Terabithia. They see each other at school, where they take a good deal of ribbing for their cross-gender friendship, but by now that sort of teasing has lost the power to hurt Jess, and Leslie has never been particularly bothered by what others think. At home, they celebrate holidays together, such as Christmas, when Jess gives Leslie a puppy and she gives him an expensive art set to develop his artistic talent, and Easter, when Leslie goes to church for the first time with Jess. Leslie is impressed by the beauty of the story of Christ. Jess and his little sister May Belle, cowed by negative and unforgiving religious training, are convinced that nonbelievers such as Leslie are doomed to hell, and find the whole experience disturbing. Nevertheless, Jess and Leslie remain the best of friends, and Jess finds a purpose in his life through Leslie's company that he's never had before.

One day the music teacher at school, Miss Edmunds, whom Jess has long had a crush on, invites him to spend a day with her touring the art galleries in Washington. This trip does much to expand his mind and make him feel as if he is special, a feeling he has previously only had in Leslie's company. Jess has a perfect day, but when he gets home he is told that Leslie drowned in the creek that morning trying to swing into Terabithia on the rope that they used for that purpose. Jess is completely devastated and goes through the stages of grief—denial, anger, fear, and sorrow—all incredibly painful to suffer and, indeed, to read about. Initially, he does not see how he is to go on initially. Leslie has raised him to new heights as the king of Terabithia, and now he feels that without her, he has no choice but to revert to the old Jess, plagued by fear and insecurity. However, eventually he realizes that he can only keep Leslie's memory, and his own newfound sense of self, alive by continuing the fantasy of Terabithia. He brings his little sister May Belle there and makes her its new queen, assuring that a part of Leslie will live on as well.