Bell's theorem states that certain statistical correlations predicted by quantum physics for measurements on two-particle systems cannot be understood within a realistic picture based on local properties of each individual particle-even if the two particles are separated by large distances. Einstein, Podolsky and Rosen first recognized the fundamental significance of these quantum correlations (termed `entanglement' by Schrödinger) and the two-particle quantum predictions have found ever-increasing experimental support. A more striking conflict between quantum mechanical and local realistic predictions (for perfect correlations) has been discovered; but experimental verification has been difficult, as it requires entanglement between at least three particles. Here we report experimental confirmation of this conflict, using our recently developed method to observe three-photon entanglement, or `Greenberger-Horne-Zeilinger' (GHZ) states. The results of three specific experiments, involving measurements of polarization correlations between three photons, lead to predictions for a fourth experiment; quantum physical predictions are mutually contradictory with expectations based on local realism. We find the results of the fourth experiment to be in agreement with the quantum prediction and in striking conflict with local realism.