Gypsy, "a musical fable" suggested by the memoirs of Gypsy Rose Lee, opens at a Seattle vaudeville house where "Baby June" and "Baby Louise" audition for a kiddy show singing and dancing Let Me Entertain You. Their mother, Rose Hovick, enters, calling "Sing out, Louise!", immediately establishing herself as the quintessential stage mother. In the next scene Rose sings Some People, and explains her determination to develop June's vaudeville career. Skeptical of Rose's motives, her aging father refuses to subsidize the scheme, whereupon Rose rips her father's solid gold plaque off the wall and hitchhikes to Los Angeles with the girls. There she meets Herbie, whom she entices to represent the girls' act. At the same time, she dangles the possibility of romance and marriage in their duet, Small World.
Through Herbie's efforts, Baby June and Her Newsboys becomes a top vaudeville act but, as the years pass, June and Louise mature, vaudeville wanes, and the troupe is found in "two plaster-cracked hotel rooms in Akron." Rose begins Louise's birthday celebration with a breakfast of reheated Chinese food. Herbie arrives with "Mr. Goldstone of the Orpheum Circuit," who offers a contract to save the day. A "forgotten Louise" sits with her present, a baby lamb, and sings Little Lamb ("I wonder how old I am.")
The next scene takes place in a Chinese restaurant in New York, where Rose and Herbie discuss the next day's audition at Grantzinger's Palace. Herbie begs rose to marry him and threatens, that if she does not, he may some day "walk." Rose sings You'll Never Get Away From Me and they end up dancing. Mr. Grantzinger does offer June a contract, but on the condition that "she go to school for a solid year and take acting lessons" and that Rose "stay away." rose, hearing this, storms out of his office. The girls, who dream of a normal life, sing If Momma Was Married, but to no avail. The troupe, infrequently employed and restless, continues to tour.
In a theater alley in Buffalo, Tulsa, one of the "Farmboys" in the act, tells Louise his dream of forming a dance team and performs the number All I Need Is the Girl. Louise dreams of being that girl, but is again disappointed. In the final scene of Act One, Louise brings Rose a goodbye note from June, who has herself run off with Tulsa. Rose is stunned. Herbie begs her to marry him and give up show business, and Louise urges her to accept Herbie's offer. Instead, Rose announces to a horrified Louise that she will make her a star, and then sings Everything's Coming Up Roses to conclude the act.
Act Two opens with a rehearsal of "Madame Rose's Toreadorables," a transparent reworking of the Baby June show. Louise rips off the blonde wig that Rose has provided and announces, "Momma, I am not June." Rose tries to reassure her and, with Herbie, they sing Together, Wherever We Go. After a period of little work, Herbie finally gets the act - now "Rose Louise and Her Hollywood Blondes" - a two-week booking. To everyone's surprise, the venue turns out to be a burlesque house. When Rose discovers this, she is adamant that the troupe withdraw. But Louise emerges as the voice of practicality: "Momma, we're flat broke. We've got to take this job." Louise learns that you don't need talent to be a burlesque star when a trio of broken-down strippers sings You Gotta Have a Gimmick.
Rose has agreed to marry Herbie at the end of this engagement. She and Louise are packing to leave when the theater manager announces his star attraction has been arrested "for soliciting" in the drugstore next door. Rose immediately responds, "My daughter can do it." She begins to plan Louise's costume, music, etc. as Herbie, revolted, tells Rose he is leaving her forever. Rose pushes her frightened daughter onstage, where Louise shyly sings Let Me Entertain You and, before the audience's eyes, evolves into strip-teaser Gypsy Rose Lee.
The penultimate scene finds Rose with Gypsy in her star dressing room at Minsky's Burlesque in New York. Increasingly unneeded by her now "successful" daughter, Rose bristles at Gypsy's independence and reproaches. She exits the dressing room, slamming the door behind her. Alone on the darkened, empty stage she sings Rose's Turn. Gypsy enters from stage right where she has been watching and tells Rose, "You really would have been something, Mother." The reconcile. Rose tells Gypsy her latest dream and they exit.