The major significance of the battle is that it was the first meeting in combat of ironclad warships. The Confederate fleet consisted of the ironclad ram CSS Virginia (built from the remnants of the USS Merrimack) and several supporting vessels. On the first day of battle, they were opposed by several conventional, wooden-hulled ships of the Union Navy. On that day, Virginia was able to destroy two ships of the Federal flotilla, USS Congress and USS Cumberland, and was about to attack a third, USS Minnesota, which had run aground. However, the action was halted by darkness and falling tide, so Virginia retired to take care of her few wounded — which included her captain, Flag Officer Franklin Buchanan — and repair her minimal battle damage.

Determined to complete the destruction of the Minnesota, Catesby ap Roger Jones, acting as captain in Buchanan's absence, returned the ship to the fray the next morning, March 9. During the night, however, the ironclad USS Monitor had arrived and had taken a position to defend Minnesota. When Virginia approached, Monitor intercepted her. The two ironclads fought for about three hours, with neither being able to inflict significant damage on the other. The duel ended indecisively, Virginia returning to her home at the Gosport Navy Yard for repairs and strengthening, and Monitor to her station defending Minnesota. The ships did not fight again, and the blockade remained in place.

The battle received worldwide attention, and it had immediate effects on navies around the world. The preeminent naval powers, Great Britain and France, halted further construction of wooden-hulled ships, and others followed suit. A new type of warship was produced, the monitor, based on the principle of the original. The use of a small number of very heavy guns, mounted so that they could fire in all directions was first demonstrated by Monitor but soon became standard in warships of all types. Shipbuilders also incorporated rams into the designs of warship hulls for the rest of the century.

At this time, the Union Navy had five warships in the roadstead, in addition to several support vessels. The sloop-of-war USS Cumberland and frigate Congress were anchored in the channel near Newport News. Frigate St. Lawrence and the steam frigates Roanoke and Minnesota were near Fort Monroe, along with the storeship USS Brandywine (1825). The latter three got under way as soon as they saw Virginia approaching, but all soon ran aground. St. Lawrence and Roanoke took no further important part in the battle.

Virginia headed directly for the Union squadron. The battle opened when Union tug Zouave fired on the advancing enemy, and Beaufort replied. This preliminary skirmishing had no effect. Virginia did not open fire until she was within easy range of Cumberland. Return fire from Cumberland and Congress bounced off the iron plates without penetrating. Virginia rammed Cumberland below the waterline and she sank rapidly, "gallantly fighting her guns as long as they were above water," according to Buchanan. She took 121 seamen down with her; those wounded brought the casualty total to nearly 150.

Ramming Cumberland nearly resulted in the sinking of Virginia as well. Virginia's bow ram got stuck in the enemy ship's hull, and as Cumberland listed and began to go down, she almost pulled Virginia under with her. At the time the vessels were locked, one of Cumberland's anchors was hanging directly above the foredeck of Virginia. Had it come loose, the two ships might have gone down together. Virginia broke free, however, her ram breaking off as she backed away.

Although she had not suffered anything like the damage she had inflicted, Virginia was not completely unscathed. Shots from Cumberland, Congress, and Union troops ashore had riddled her smokestack, reducing her already low speed. Two of her guns were disabled and several armor plates had been loosened. Two of her crew were killed, and more were wounded. One of the wounded was Captain Buchanan, whose left thigh was pierced by a rifle shot.

Meanwhile, the James River Squadron had turned its attention to Minnesota, which had left Fort Monroe to join in the battle and had run aground. After Virginia had dealt with the surrender of Congress, she joined the James River Squadron despite her damage. Because of her deep draft and the falling tide, however, Virginia was unable to get close enough to be effective, and darkness prevented the rest of the squadron from aiming their guns to any effect. The attack was therefore suspended. Virginia left with the expectation of returning the next day and completing the task. She retreated into the safety of Confederate-controlled waters off Sewell's Point for the night, but had killed 400 enemy sailors and had lost two. The Union had lost two ships and three were aground.

The United States Navy's greatest defeat until World War II caused panic in Washington. As Lincoln's Cabinet met to discuss the disaster, the frightened Secretary of War Edwin Stanton told the others that the Virginia might attack East coast cities, and even shell the White House before the meeting ended. Welles assured his colleagues that they were safe as the ship could not traverse the Potomac River. He added that the Union also had an ironclad, and that it was heading to meet the Virginia.

March 9: Both sides used the respite to prepare for the next day. Virginia put her wounded ashore and underwent temporary repairs. Captain Buchanan was among the wounded, so command on the second day fell to his executive officer, Lieutenant Catesby ap Roger Jones. Jones proved to be no less aggressive than the man he replaced. While Virginia was being prepared for renewal of the battle, and while Congress was still ablaze, Monitor, commanded by Lieutenant John L. Worden, arrived in Hampton Roads. The Union ironclad had been rushed to Hampton Roads in hopes of protecting the Union fleet and preventing Virginia from threatening Union cities. Captain Worden was informed that his primary task was to protect Minnesota, so Monitor took up a position near the grounded Minnesota and waited. “All on board felt we had a friend that would stand by us in our hour of trial,” wrote Captain Gershom Jacques Van Brunt, the vessel’s commander, in his official report the day after the engagement.

The next morning, at dawn on March 9, 1862, Virginia left her anchorage at Sewell's Point and moved to attack Minnesota, still aground. She was followed by the three ships of the James River Squadron. They found their course blocked, however, by the newly arrived Monitor. At first, Jones believed the strange craft—which one Confederate sailor mocked as "a cheese on a raft"—to be a boiler being towed from the Minnesota, not realizing the nature of his opponent. Soon, however, it was apparent that he had no choice but to fight her. The first shot of the engagement, was fired at Monitor by Virginia. The shot flew past Monitor and struck Minnesota, which answered with a broadside; this began what would be a lengthy engagement. “Again, all hands were called to quarters, and when she approached within a mile of us I opened upon her with my stern guns and made a signal to the Monitor to attack the enemy,” Van Brunt added.

After fighting for hours, mostly at close range, neither could overcome the other. The armor of both ships proved adequate. In part, this was because each was handicapped in her offensive capabilities. Buchanan, in Virginia, had not expected to fight another armored vessel, so his guns were supplied only with shell rather than armor-piercing shot. Monitor's guns were used with the standard service charge of only 15 lb of powder, which did not give the projectile sufficient momentum to penetrate her opponent's armor. Tests conducted after the battle showed that the Dahlgren guns could be operated safely and efficiently with charges of as much as 30 lb.

The battle finally ceased when a chance shell from Virginia struck the pilot house of Monitor and exploded, driving fragments of paint and iron through the viewing slits into Worden's eyes and temporarily blinding him. As no one else could see to conn the ship, Monitor was forced to draw off. The executive officer, Lieutenant Samuel Dana Greene, took over, and Monitor returned to the fight. In the period of command confusion, however, the crew of Virginia believed that their opponent had withdrawn. Although Minnesota was still aground, the falling tide meant that she was out of reach. Furthermore, Virginia had suffered enough damage to require extensive repair. Convinced that his ship had won the day, Jones ordered her back to Norfolk. At about this time, Monitor returned, only to discover her opponent apparently giving up the fight. Convinced that Virginia was quitting, with orders only to protect Minnesota and not to risk his ship unnecessarily, Greene did not pursue. Thus, each side misinterpreted the moves of the other, and as a result each claimed victory.