The Green Mist was some kind of mystical fog, which was first seen in the East. There had been reports of fishermen and sailors disappearing out at sea, never to be seen again. The people of the Lone Islands were obviously the first to hear of it, and the first to suffer its power.
The exact time when the Mist first began appearing is unknown, but apparently with every person it took the Mist grew steadily stronger. It preyed on people's weaknesses and their fears, and made their darkest dreams come true, to frighten or tempt them.
When the Seven Lost Lords from Narnia came to the Lone Islands, at the port of Narrowhaven, they learned of the Mist and made a vow to find a way to destroy it. They each set sail, except for Lord Bern who was arrested and jailed for a number of long years, but none of them ever returned.
When more people began disappearing, the leaders at Narrowhaven became afraid, and in a bid to save themselves they began making sacrifices to the Mist, sending in people who they were unable to sell as slaves.
When the Dawn Treader arrived in Narrowhaven, Caspian X, Edmund, Lucy and Eustace were ambushed while they were investigating the town and put in chains so they could be sold into slavery. The slave-trader, Pug, and his men were known to sell and sacrifice slaves.
While Caspian and Edmund were jailed, they met Lord Bern who told them about the Mist. Later that day, at the slave auction where Lucy and Eustace were to be sold, Drinian, Reepicheep and the crew of the Dawn Treader attacked the slavers to free Caspian and his friends. With the aid of the islanders who also fought against their corrupt leaders, Pug, the Governor Gumpas and all their men were defeated.
When Caspian learned of the Mist, he vowed to not only find the missing Lords, but also to put an end to the MIst and find the island's missing citizens.
During the journey of the Dawn Treader, they met the magician Coriakin. He warned them that the Mist was a danger to them all. He had even made the Duffelpuds (or Duffers) of his island invisible, to protect them, though they didn't see it this way.
Coriakin said that the Mist originated from a place called Dark Island, a place where evil lurked, and that it sought to corrupt all goodness and steal light from the world. The only way to stop it and break its spell was by locating the mystical Seven Swords. These blades were originally a gift from Aslan, forged in the Golden Age of Narnia, meant to protect Narnia from evil. If they found all seven swords, and laid them at Aslan's Table, then the Mist would be undone. But until they laid down the seventh sword, the Mist would have the upper hand with them, forever trying to tempt them. It tried to seduce everyone with its dark power, but the ones it had the most effect on were Lucy, Caspian, Eustace and Edmund.
With Caspian, it appeared in the form of his late father and tried to make him believe that he was a disgrace to him.
With Edmund, it enhanced his avarice, making him so full of greed that he was willing to fight Caspian on Deathwater Island so that he could have the water that changed all things into gold for himself (it also did the same thing to Caspian, who also yearned for the gold), but both were able to resist it.
Eustace, too, seemed to be affected by the Mist when he found a Dragon's treasure and tried to steal it (it's possible the greed might have been his own, and the Mist was just watching, but it was definitely there at the time of his transformation). What he did not know, however, was that a Dragon's treasure was cursed to change someone into a dragon, should they try to steal it.
The more notable one was Lucy, as it enhanced her vanity, making her want to be as beautiful as her sister Susan. She was already self-conscious of her looks, but the Mist increased it to the point where she went so far as to steal a page from Coriakin's book of spells, which had a spell that turned herself into Susan. However, the effects were not to her liking, and with Aslan's help she was able to overcome her jealousy.
Whether the Mist had a hand in what happened to each of the Lords is unclear, but when Lord Rhoop made it to Dark Island, the Mist kept him in a permanent state of intense fear, leaving him a mentally broken man.
When the Dawn Treader arrived at Dark Island, the Mist took on the form of a giant Sea Serpent, which it got from the mind of Edmund, and tried to destroy them all. Eustace was able to fight the Sea Serpent, due to him still being a dragon, and hold it back from the ship. Unfortunately, he was stabbed with the last of the seven swords by Lord Rhoop
Thankfully, though, Aslan saved Eustace by changing him back into a boy, and transported him back to Ramandu's Island, along with the sword. Upon awakening there, Eustace took the last sword straight to Aslan's Table. The Mist attempted to stop him, by seizing him in his tracks, but he was able to beat it, thanks probably to the sword's magic, and then placed it down, releasing the sword's full power and ending the Mist forever.
Before he did, though, the Mist had taken on the forms on various people from the crew's subconsciousnesses.
With Rhince, it took on the form of his missing wife, Helaine, who had been one of the many unfortunate souls sacrificed to the Mist back on Narrowhaven.
With Edmund, it took on the form of the White Witch, Jadis, who tempted to him to join her, as the real White Witch did in life, but Edmund was able to reject her once Eustace laid the last sword down.
For good measure, Edmund then stabbed the Sea Serpent with Rhindon, killing the beast. With its death, the rest of the Mist suddenly dissipated, and then all the missing people that the Mist had taken were returned, indicating that the Mist was gone for good.
- When Eustace tried to place the sword on the table, the Mist attempted to stop him, apparently taking on a more solid form and grasping him in its clutches. This indicates that the Mist can physically attack a person, should the need arise for it, though whether it did this regularly is unknown.
- It was revealed in the DVD commentary that the power behind the Green Mist was none other than The Lady of the Green Kirtle. The producers/directors mentioned that they needed a villain, and that it was never stated in the Silver Chair book whatever happened to all the missing people who went looking for the prince. (This indicates that the film producers may alter the books again for the films, possibly for the witch to have been planning to use the people that the Mist took (humans and Narnians) to help build the tunnel, as well as the Gnomes (which were the only creatures she used in The Silver Chair book).
- The Green Mist is not in any of the books, and thus is only canon to the movies' continuity.