Madeleine is Sleeping is an allegorical tale about a young girl's coming of age. Madeleine is first condemned by society, responds by taking flight and rebelling and ultimately embarks upon a doomed quest for redemption. Her condemnation takes place as a result of being caught playing sex games with the village idiot, a man by the name of M. Jouy. Although all the other girls in the village play the same games with the idiot, Madeleine is the only one who responds with fascination instead of revulsion. One of the other girls, Sophie, rats her out and Madeleine becomes the scapegoat for all the girls' behavior, as well as for the behavior of M. Jouy. The village gendarme sends M. Jouy to an insane asylum, but Madeleine's severe mother feels the need to inflict a permanent punishment on Madeleine, forever branding her for her sins. She dips Madeleine's hands into a pot of boiling lye, wraps her hands in homemade poultices and sends her off to a convent.

Madeleine, angry at her treatment, escapes the convent and joins a traveling band of actors, misfits and runaways posing as a gypsy caravan. The traveling company is led by Marguerite, an actress who encourages Madeleine to reject society's disapproval, transform herself and find redemption through the appreciation of an audience. Marguerite unwraps Madeleine's hands, which have grown together to form mitten-like paddles. To Marguerite's delight, Madeleine chooses to learn and perform contortionist acrobatics with her paddle-like hands.

Another member of the troupe, M. Pujol, is a man also seeking purpose and approval through a stage audience, as he desperately seeks to recapture his former success on the stage. M. Pujol's act demonstrates his unusual deformity-one that allows him to sing and play musical instruments through his rectum. In M. Pujol's mind, the humiliating nature of this "talent" was at least somewhat compensated for by the appreciation of his audience. Unfortunately, audiences have grown too sophisticated for his brand of humor and so M. Pujol now endures daily humiliation without the compensation of audience admiration. Perhaps because she feels so sorry for him, Madeleine falls madly in love with the flatulent man, although, ironically, she herself becomes the unwilling instrument of his humiliation.

Times have been hard for the gypsy troupe, as the audiences have stopped coming to their shows. Consequently, they accepted their only financial offer: to pose as live pornographic characters for a lecherous old widow's pleasure. As part of the pornographic tableau, the widow has Madeleine use her misshapen hands to beat M. Pujol's naked backside. A photographer named Adrien, who is also in love with M. Pujol, captures each night's paddling session on film.

The carnival freaks are afraid of the old widow and even more afraid of not earning a living, so they continue to gather each night and pose for another session. One day, Madeleine sees herself in the photos and gains a different perspective on her actions: She sees herself becoming the victimizer instead of the victim. In response, Madeleine refuses to paddle M. Pujol again, even though the widow beats her with an ivory fan to try to change her mind. M. Pujol, who has accepted his nightly humiliations, balks at the widow's violent treatment of young Madeleine. He realizes that he can save Madeleine by leaving. Despite his fear of the widow, he slips a note under her door stating that he's going to the hospital to donate his body to scientific study.

Madeleine and Adrien's shared love for M. Pujol brings them together as friends, lovers and ultimately, traveling companions, when they set off to rescue M. Pujol from the hospital. Upon arriving at the hospital, which is actually more of an insane asylum, Madeleine's freakish hands nearly land her in a padded cell. However, Adrien claims she is his assistant and offers his photography services to the hospital director, who believes photography can help him diagnose his patients. The director, who is mad himself, plans to perform an exploratory surgery on M. Pujol that could be fatal to the flatulent man.

While they are at the hospital, Adrien's interest shifts from M. Pujol to Madeleine. Madeleine, however, resolves to save M. Pujol in every way: first, by rescuing him from the hospital and second, by restoring his career to its former luster. She plans to build a stage for him in her home village, believing that her narrow-minded neighbors are just the sort of people who would enjoy M. Pujol's act.

Meanwhile, Madeleine's mother is suffering from anger and depression. Mourning the loss of her daughter, she searches for a way to bring Madeleine home without having to face the horror of her own actions. Mother clings to her harshly judgmental beliefs in order to avoid seeing herself as a woman who permanently mutilated her own daughter. In addition, the villagers have turned against Mother because Madeleine is not the only one of Mother's children to behave wickedly. Beatrice, Madeleine's sister, has become the leader of the village girls and draws them into sexual games that the villagers consider wicked. The villagers refuse to buy Mother's preserves anymore and revile her in the village. However, joy finds Mother again when inspiration gives her the answer: Madeleine could marry M. Jouy, thus redeeming her in the eyes of both God and, hopefully, the village.

Madeleine envisions her triumphant homecoming. She will be the stage queen who brings the shining talents of Le Petomane (M. Pujol) back to life. Her hometown will shower her with praise and affection for bringing them such a treasure. In this way, she will be transformed in their eyes, finding acceptance, love and respect. As is the case with many ostracized misfits, Madeleine believes she has to achieve superstardom in order to be granted even basic acceptance by society. She aims high and her ultimate failure and public humiliation are proportionately monumental.

Through a tragic mistake, it is not Le Petomane who appears on stage, but M. Jouy, Madeleine's molester. Horrified at the error, Madeleine takes the stage herself and tries to wow the villagers with the acrobatics and pornographic tricks she learned from the traveling group of outcasts. The villagers see Madeleine's mutilated hands and are stunned by pity and guilt. Madeleine, however, is unwilling to play the part of the woman wronged. She scorns their pity and guilt and humiliates herself on the stage in her attempts to win their approval. Madeleine has rejected the stern morals of the village, but without proper parental guidance, has replaced them with no morals at all. In her increasingly pathetic attempts to gain the audience's approval, she commits the most flagrantly hideous acts on stage, including spanking M. Jouy's naked backside in front of the Mayor and her parents. Finally, overcome by humiliation, Madeleine swoons to the ground and sleeps. The stage manager comes onto the stage and begins to explain Madeleine's story to the enraptured crowd.