The game is played from a first-person perspective. Melee combat is performed by using the mouse, and dragging the cursor across the screen to attack. Magic is used by cycling through a menu found by clicking the appropriate button on the main game screen, then clicking the spell to be used, and its target. The game world is very large. Players may explore outside cities into the wild. There they may find inns, farms, small towns, dungeons, and other places of interest.
Arena has been noted for its tendency to be unforgiving towards new players. It is easy to die in the starting dungeon, as powerful enemies can be encountered if the player lingers too long. This effect gradually disappears as the player becomes more powerful, and more aware of the threats that loom everywhere. Ken Rolston, lead designer of The Elder Scrolls III: Morrowind, says he started the game at least 20 times, and only got out of the beginning dungeon once.
Emperor Uriel Septim VII has been imprisoned in another dimension, and impersonated by Imperial Battlemage Jagar Tharn. During his usurpation of the throne, Tharn is unable to corrupt his apprentice, Ria Silmane, and so he murders her.
Ria is able to hold herself together long enough to direct the player's character how to escape from slow death in the dungeons. Past that point, she lacks the power to manifest physically, and appears to the player during dreams. The central quest requires the player to obtain various artifacts. Each time such an item is found, Silmane appears the next time the player rests, in order to provide the general location of the next such item. This culminates in the player finding and assembling the pieces of the Staff of Chaos, battling Tharn in the Imperial City, and rescuing the Emperor.