On the way to Burtnieks's Castle, Bearslayer visits the castle of the Latvian Lord Aizkrauklis, where he is stunned by the beauty of Aizkrauklis's daughter, Spidala. However, he watches her and discovers that she is a witch. He follows her by hiding in a hollow log on which she flies to the Devil's Pit, and witnesses evil rites, as well as seeing the false holy man, Kangars, promise to serve the Devil by working against the ancient gods and supporting Christianity, because Christians are easier prey for the Devil. On the journey back to Aizkraukle Bearslayer is cast down into the whirlpool of Staburags in the River Daugava by Spidala and another witch. From here he is rescued by Staburadze, as we already know from Canto I, and taken to her Crystal Palace beneath the whirlpool.
With the help of the beautiful and virtuous maiden, Laimdota, Staburadze nurses Bearslayer back to health. She reveals to him that he has been chosen by the gods to fight against evil, especially Spidala and Kangars, who are plotting in secret. Staburadze gives him a talisman, a magic mirror, and Laimdota gives him a ribbon decorated with an oak-leaf pattern. He leaves the Crystal Palace and is duly turned to stone, as are all mortals, but is restored to life by Perkons. He performs a second heroic deed, saving a boat that is sinking in the raging River Perse by rowing with his bare hands, and is befriended by a powerful youth, Koknesis. Together they ride to Burtnieks, accompanied by the curses of Spidala.
Canto III opens with Spidala hurrying to the hut of Kangars to warn him that Bearslayer was present in the Devil's Pit and saw the shameful deeds. To prevent Bearslayer revealing that he and Spidala are in league with the Devil, Kangars decides to lure the young hero into a trap by provoking a war against the Estonian Giant, Kalapuisis, certain that Bearslayer will rush into battle against the invincible foeman and be killed. As Kangars explains this plot to Spidala a terrible storm arises, and Spidala is unable to return home.
The storm was sent by Perkons to destroy a ship just arriving at the mouth of the River Daugava from Germany, in order to kill the German missionaries it is carrying. Led by the priest, Dietrich, they have come with the intention of forcing the Baltic people to accept Christianity. However, the Livian fisher-folk of the Daugava estuary rescue the passengers from the ship. Thus, they thwart the will of Perkons, who had planned to drown the newcomers, and save the very people who will eventually become their conquerors. The morning after the storm, a fisherman brings Dietrich to Kangars, and an alliance is forged, since both want to introduce Christianity, although for differing reasons.
Years pass. Bearslayer and Koknesis study hard in the Castle of Burtnieks. Bearslayer has a special reason to seek perfection: Laimdota is the daughter of Burtnieks and has returned home to the castle from Staburadze's Crystal Palace, where she and Bearslayer met. They fall in love, but just as Bearslayer is about to ask for her hand news arrives that Kalapuisis has entered Latvia and is killing and laying waste. Burtnieks offers Laimdota's hand to any warrior who can rid them of Kalapuisis, and Bearslayer rides out to face him: The plot seems to be succeeding!
Bearslayer faces Kalapuisis in single combat, and defeats him. However, just as Bearslayer is about to kill him, Kalapuisis reveals a prophecy told him by his mother that a bear cub from the Daugava, who is of noble rank and equal to Kalapuisis as a warrior, will come and save the Latvians from their conquerors. The two warriors realize that Bearslayer is this bear cub, and that they have a common enemy-the Germans-and make peace, so that they can work together against the invaders.
Successful in the Estonian war, Bearslayer returns to Burtnieks's Castle with the other Latvian warriors, and they are greeted in song by the local maidens. Laimdota places an oak-leaf wreath on Bearslayer's head and sings of his might, promising to make him a true and virtuous wife. Bearslayer replies in song that he will live and die for Laimdota. Amid great joy and feelings of brotherhood the warriors toast Bearslayer, and conclude that the gods personally intervened on his behalf. This divine intervention gives Bearslayer legendary status so that, instead of destroying him, the plot added to his fame.
Once again, time passes while Bearslayer studies at the Castle of Burtnieks. One night he notices in the fortress's undercroft a trapdoor, left half-open to reveal a stone staircase leading below. He goes down and follows a tunnel until he enters a large chamber that he judges to be beneath the centre of the lake. He is in the Sunken Castle that Laimdota had told him about. He discovers Laimdota reading an ancient book. She explains to him that if a mortal remains in the Sunken Castle overnight and survives until morning, the castle will rise once more into the light of day. Bearslayer resolves to carry out this heroic task and Laimdota leaves him.
Midnight passes and the Sunken Castle grows cold. Bearslayer lights a fire from broken wood lying around. Suddenly seven evil spirits enter the room carrying an open coffin, in which an old man with huge sharp teeth and long nails is lying. He begins to groan horribly and complain that he is cold. Bearslayer cannot bear the sound and hauls the man from the coffin to the fire, but the old man tries to bite off Bearslayer's ears, knowing that without them Bearslayer is weak. Bearslayer fights back and holds the old man in the fire, saying that he will only let him go if the Sunken Castle is raised to the surface.
At this, a whirlwind springs up and the seven evil spirits return, led by Spidala. They attack Bearslayer and he is about to be defeated when he remembers the mirror that Staburadze gave him. He pulls it out and holds it in Spidala's face. A howling fills the air and all the evil spirits turn to dust and are whirled round the room in the whirlwind. The spirit of Viduveds, a wise man of ancient times, appears in human form and greets Bearslayer, saying that the young hero will save the Latvian people. Viduveds's handmaidens make a bed for Bearslayer, and he falls into a deep sleep.