In Act 3 of 'Romeo and Juliet,' Mercutio and Tybalt's confrontation leads to Mercutio's fatal injury, instigating Romeo's vengeful killing of Tybalt and resulting in his banishment from Verona. Juliet, unaware of these events, is devastated by the news of Romeo's banishment and feels caught between her family and her love for Romeo. The act highlights the themes of fate, family loyalty, and the consequences of impulsive actions.