At a school called P.S. 5, a teacher named Miss Walker tells some children a version of E. T. A. Hoffmann's The Nutcracker and the Mouse King, involving the Care Bear Family. As the story begins, the Care Bears and their Cousins prepare for Christmas in their home of Care-a-lot; the two youngest bears, Hugs and Tugs, are searching for an ornament. While the others spend time in the Hall of Hearts decorating a tree, another bear called Funshine suddenly alerts them of an unhappy girl named Anna. Enlisting Grumpy Bear to go along, she takes a Cloud Mobile down to Earth.
When the two bears visit Anna, they learn that her past friend Sharon has moved, and her brother Peter is fond of acting as a pirate. As they talk about the virtues of friendship, a burst of light startles them. Eventually, a tall wooden soldier called the Nutcracker emerges from a black portal, along with a band of rats (led by the Rat King) who are after him. When the group hides from their foes, the soldier recollects his memory and explains that he arrived from a place called Toyland; the rodents work for an evil Vizier who is plotting to conquer and destroy that land.
Soon, Funshine and Grumpy send out beams of light from their stomach, sending a "Care Bear Stare" to their assistants in Care-a-lot; Lotsa Heart Elephant, Brave Heart Lion and Tenderheart Bear (along with stowaway Hugs and Tugs) later join them. The baby bears are asked to stay behind with Peter, but those three venture into Toyland nonetheless.
At his castle, the Vizier wants to know the whereabouts of a powerful ring worn by Toyland's former Prince, so that he can control the place. His captive, a small creature called the Sugar Plum Fairy, refuses to tell him; he is more outraged when the Rat King arrives without the Nutcracker. The Vizier soon takes notice when the soldier and his friends enter Toyland, and take a train through its various sights.
When they stop for the night, the friends contend with a group of toy jesters who also want the train, but advise them to leave Toyland. One of them later explains how they tried to save their land, after the Vizier and the rats overthrew its Prince and captured his castle. To make sure the Vizier never got it, the Fairy hid the Prince's ring away from view. The Nutcracker is determined to end the Vizier, despite the rats' barricade.
Upon reaching the castle by raft, the group secretly sneaks inside and frees the Sugar Plum Fairy. With her help, the Bears and Cousins try to get a walnut containing the ring, but the Vizier seizes it and turns them into firewood. This leaves Peter, Hugs and Tugs to fight with the rats for the item. Soon, the Fairy saves it from the Vizier, and when the Nutcracker wears it on his finger, he turns back into the Prince of Toyland. The Bears and Cousins break free from the ruler's spell, and use their Stare on the villains to save the place. Afterward, they and the humans say good-bye to the Prince; as Anna returns, she realises it was a dream and wakes up to meet a new neighbour, Alan Prince, who looks exactly like the Prince in Anna's dream.
When Miss Walker finishes her tale, one of the children wants to ask what happened to Anna. Suddenly a grownup Alan appears at the door. As he and the teacher, now revealed to be Anna, leave the stage together, the other children start rehearsing Pyotr Ilyich Tchaikovsky's ballet. Unknown to all of them, the Care Bear Family has been listening all along.
Care Bears Nutcracker Suite is loosely based on The Nutcracker and the Mouse King by E. T. A. Hoffmann, as well as the Nutcracker ballet by Pyotr Ilyich Tchaikovsky. Animation was produced by Toronto's Nelvana; South Korea's Hanho Heung-Up; Taiwan's Wang Film Productions; and the Shanghai Animation Film Studio in China. The special was presented by Neil B. Saul of The Saul Group, and produced by Nelvana in association with Canada's Global Television Network. American Greetings staff members Jack Chojnacki (of Those Characters from Clevland) and Harvey Levin (a vice-president) were credited as creative consultants. This is the only Nelvana production of a Care Bears special; the first two, The Land Without Feelings and The Freeze Machine, were produced by Atkinson Film-Arts in the early half of the 1980s. After Nutcracker Suite, Nelvana would not venture into another Care Bears project until 2004's Journey to Joke-a-lot.
Care Bears Nutcracker Suite was originally planned for a theatrical release, but premiered on home video and television instead. The special debuted on the U.S. premium cable network The Disney Channel on December 10, 1988. In Canada, it aired commercial-free on the Global network on December 25, as part of the regular Care Bears series. The special was shown likewise on Malaysia's TV3 in December 1989.
The North American VHS and Beta editions were released in December 1988 by Kids Klassics, a division of GoodTimes Entertainment. This was one of the label's three Christmas titles for that year; the others were Christmas Comes to Pac-Land and A Flintstone Christmas. The film was released on Region 2 DVD in France (on June 2, 2004), with Warner Vision's edition of Les Calinours au pays de casse-noisette. On November 7, 2006, Lions Gate Home Entertainment released the special on DVD for the first time in North America, under the title Care Bears: The Nutcracker.
On its original airing, Associated Press writer Kathryn Baker deemed the Nutcracker special "Strictly for those who prefer jelly beans to Christmas dinner." In 1991, Chris Hicks of Utah's Deseret News gave it 1½ stars out of four, commenting that "Even my young children find this one too saccharine". The special is mentioned in Craig Nelson's Bad TV: The Very Best of the Very Worst, in a section entitled "The Curse of the Top Five Annual Christmas Specials" (along with those based on The Smurfs and The Poky Little Puppy).