Part One of the poem describes the scene and introduces the Lady of Shallot. A river runs parallel to a road which goes to Camelot. The Lady is in a tower and although no one has seen her, early risers have heard her sing.
The Lady spends all her time weaving what she sees. She has heard that she will be cursed if she looks directly at Camelot, although she is unclear about the exact nature of the curse. As part of the curse, the Lady can not look directly out the window. She must look at the world through the reflection in the mirror. She is like the prisoners in Plato's cave who only see an indirect version of the world. At the end of Part Two, she is growing tired of observing the world indirectly, "I am half sick of shadows."
Lancelot approaches and the Lady can not help herself. She finally goes and looks directly at the world, bringing the curse upon her.
She exits her building and goes to the river. She finds a boat and writes "The Lady of Shallot" on it. She lies down in the boat and sings while floating to Camelot. She dies while singing. As she silently approaches Camelot, those who see her in the boat read the name "The Lady of Shallot" and wonder who she is. Lastly, Lancelot says "She has a lovely face." According to the context of the poem, this is the first time anyone has directly seen her. Prior to this, only her singing has been heard. This is also the first time she has looked directly at the world.
This poem does have a fairy tale quality to it. Although the curse is ambiguous, it is necessary to keep the Lady looking at the world indirectly. And since she weaves all that she sees, this poem is about (among other things and themes) the difference or blurred lines between reality, perception and artistic creation (in this case, the arts are weaving and the poem itself). That's one of the themes and there are many different ways this poem can be interpreted in light of this theme; that is to say, what it could mean.