In the first 12 lines we learn it is late fall, the grasses have all "wither'd" and the birds are long gone for the winter, and the harvest is now over. The speaker comes upon a sad knight, who is described as sad both physically and emotionally. The mention of the lily and the fading rose describe his pale face. The words "moist" and "fever" hint at him being ill because of his state. He asks the knight "O what can ail thee?"
In lines 13-24 we find that there indeed is a lady involved. She is described as a "faery's child" suggesting that he has fallen for a goddess of some sort. Most of the time these relationships between mortal and immortal don't work out well for the mortal. He is completely enamoured with her, and mistakes her feeling for him as love. He then gives her gifts of "garland" and "bracelets." She has complete control over him and his feelings for her when she sings to him her "faery's song." This enchants him further.
Then in lines 37-48 the knight has a dream. In this dream he is warned by others who have loved and lost from "La Belle Dame sans Merci," which means the lovely lady without pity. He doesn't listen to them, though, and when he awakens, the world is void of beauty. Now that he's seen true beauty, all else in the world pales to her. The setting and his view of the world finally come together.