The Lady of Shalott dies in a mystical and unnatural way. She has been confined to a tower from which she can only see out through a window. However, she is not actually allowed to look directly outside and can only look at the window's reflection in a mirror. In the first stanza of part II, the speaker says that she must "weave alway" and that "A curse is on her, if she stay / Her weaving, either night nor day." In other words, the lady is under a mysterious curse that even she does not seem to fully understand. The speaker says that "She knows not what the curse may be." She knows only that she must weave without stopping (to "stay" means to stop in this case) and that a terrible fate awaits her if she ceases weaving.
The life of the Lady of Shalott is thus diminished, partial. She experiences "little joy or fear" because she is not allowed to participate in the full spectrum of human life, experience, and emotion. "She hath no loyal knight and true," and seems, therefore, never to have known love. One day, though, Sir Lancelot comes into her view, and she sees how he "glow'd" as he "flash'd into the crystal mirror," and she moves to the window to see him, apparently without any thought for her own well-being. At once, the "mirror crack'd," and she realizes that she has called the curse down upon herself with her actions. It seems that she falls in love when she sees Lancelot and acts before she can consider her fate.
So, knowing that she will now die, she goes to the stream and finds a boat to lie down in. She carves her title into the stern and sets the boat adrift. Singing "her deathsong," the boat follows the stream to Camelot, and the lady dies while she is singing.