Mercutio dies when he is stabbed by Tybalt who reaches under Romeo's arm. After this Tybalt flees with his followers.
In Act III, Scene 1, Mercutio, Benvolio, a page and servants enter a public place. Because of the heat and because the Capulets are also walking around Verona, Benvolio urges Mercutio to "retire" to their homes so that they will not become involved in a brawl. But, Mercutio, who is very short-tempered on this hot day, accuses Benvolio of getting angry at almost nothing when he is in a mood to be angry, so he should not criticize any one else.
This argument between friends sets a threatening tone for the scene. Then, as Benvolio and Mercutio quarrel, Tybalt enters with some other men. He asks to have a word with Benvolio and Mercutio. Annoyed by Tybalt's intrusion, Mercutio taunts him with puns until Romeo enters. Tybalt then turns his attention to Romeo, calling him "a villain," but since Romeo has married Juliet and is now related by marriage, he speaks kindly to Tybalt, saying that he "tender[s]" the name Capulet and loves him.
Not knowing why Romeo says these things, Mercutio is incensed--"Oh, calm, dishonorable, vile submission!"(3.1.44), and he draws his sword. He and Tybalt exchange insults and Tybalt draws his sword, too. With the intention of ameliorating things, Romeo steps between them, urging them not to fight because the Prince has forbidden "this bandying in Verona streets" (3.1.56), but Tybalt reaches under Romeo's arm and fatally stabs Mercutio.