Phantasy Star III appears at first to take place in a medieval fantasy setting, in contrast to the science-fiction settings of previous games. A thousand years prior to the start of the game, two factions — one led by the swordsman Orakio, the other by the sorceress Laya — were engaged in a bitter conflict. An attempt at peace was made when the two leaders met for an armistice, but soon afterwards they both mysteriously vanished. This placed the two factions in a precarious situation, as each blamed the other for their leader's disappearance. All communication between the Orakians and Layans was suspended, travel between their respective worlds was prohibited, and the two groups teetered on the brink of war.

Players take control of Rhys, Crown Prince of the Orakian kingdom of Landen, on the day of his wedding to Maia, a mysterious amnesiac who washed up on Landen's shore two months earlier. During the ceremony, a dragon — identified as a Layan — suddenly appears and snatches Maia, in what seems to be an overt escalation of the Layan-Orakian conflict. During Rhys's search for Maia, he recruits various characters to his cause. Ultimately, it is revealed that Maia herself is Layan — Princess of the kingdom of Cille — and that her kidnapping was actually a rescue attempt by her people, who believed she had been stolen from them by the "hostile" Orakians.

It becomes evident that the Layan-Orakian conflict has been one of relativism, with neither side good nor evil, sustained by a mutual prejudice. It is a conflict that prevails until the characters of Phantasy Star III - spanning three generations - come to shocking revelations about their worlds, about Laya and Orakio, and ultimately, expose the true root of evil.

According to the English translation, the game takes place concurrently with Phantasy Star IV, as both games are claimed to occur 1,000 years after the events of Phantasy Star II, though this is never firmly established. In fact, in the Japanese version of the game, the events take place 1,000 years after the events in Phantasy Star IV. This has important consequences in the continuity. First of all, it means that the Devastation War between Laya and Orakio in the U.S. version took place only a little while after leaving Palma. In the Japanese version, it means that Dark Force is still present, despite the sealing away of the Profound Darkness in Phantasy Star IV.

A crashed worldship similar to the Alisa III is seen on the surface of Motavia in Phantasy Star IV. However, it is not the Alisa III itself, but another one of the evacuation fleet that escaped the destruction of Palma in the second game. The Wren android that appears in this game is unrelated to the Wren seen in Phantasy Star IV except by being a similar model. In the Japanese versions, Phantasy Star III's Wren is named Searren, while Phantasy Star IV's Wren is named Forren.

First Generation

Rhys (Kein in the Japanese version) - the game's first playable character and a balanced-type character. He is the prince of the Orakian kingdom of Landen whose quest begins as he seeks to rescue Maia, his bride-to-be, after she is kidnapped by a Layan dragon. Rhys fights with swords, knives, or needlers. Due to his full-blooded Orakian heritage, he cannot use techniques.

Lyle is a mysterious man who joins Rhys to repair the weather-control system on Aridia, but seems to have his own separate agenda. Lyle fights with twin staffs, but can also use techniques, an ability that suggests Layan ancestry. He is a skill-type character.

Mieu is a combat android designated for close-quarters fighting, overwhelming her opponents with her lightning-fast reflexes and deadly claws. She waited by a lake for 1,000 years in anticipation of "a descendant of Orakio" to command her. Despite being neither Layan nor Orakian, she is capable of using techniques. The full extent of her functions is a mystery. She is a speed-type character who remains a playable character through all three generations.

Wren (Searren in the Japanese version) is an android who specializes in managing and analyzing technical systems. In combat, he uses various large firearms. He joins Rhys in order to help him fix the weather system and thus thaw out the entrance to the world of Aquatica. He, along with Mieu, is one of the two characters who stay on through all subsequent generations.

Lena is the young princess of Satera, an Orakian kingdom west of Landen. She first appears to help Rhys escape from the dungeon, where he was thrown by his father to prevent him from starting a war with the Layans. She becomes a permanent member of Rhys' team towards the end of his quest. As a pure-blooded Orakian, she fights with knives and needles and cannot use techniques, making her fit as a balanced-type character.

Maia (Marlena in the Japanese version) is the mysterious woman who washes up on the shores of Landen without her memory and gets taken in by the royal family, where she falls in love with Rhys and eventually becomes engaged to him. Her kidnapping sets the game's story into motion.

Second Generation

Ayn (the main character if Rhys marries Maia) is the heir to the throne of Cille. But as his father sends him with Mieu and Wren to find Satellite, a haven of eternal peace, cyborgs begin to assault their kingdom, and the royal family and the inhabitants flee. Ayn is thus asked to find the lunar utopia, Azura, to save his family. Ayn inherits swordfighting ability from his father, Rhys, and the use of techniques from his mother, Maia. He is an all-around character.

Thea (Lann in the Japanese version) is Lyle's daughter and the princess of Shusoran. As the cyborgs attacked the city, they kidnapped and imprisoned her in the dungeon of Lensol. Once Ayn rescues her, she becomes a valuable ally, using twin slicers and various techniques.

Sari (Lynn in the Japanese version) is Lena's daughter and the ruler of Landen and Satera. Just like her mother, she is a pure Orakian, meaning she fights with knives and needlers and cannot use techniques. Although her first encounter with Ayn is as an enemy, she eventually joins him on his quest. Unlike Lena, she is incredibly powerful and arguably the strongest character in the game.

Siren is an ancient android who once fought alongside Orakio. After a thousand years, he has continued to nurse a deep hatred for all Layans. He commands a massive army of cyborgs, his goal being the complete extermination of Laya's clan.

Nial (Lane in the Japanese version) is the main character if Rhys marries Lena, is the prince of the kingdoms of Landen and Satera. When unknown monsters invaded the kingdom of Satera, slaying Lena's father, King Rhys sends Nial, along with Wren and Mieu, to investigate. It turns out to be an assault by a Layan general named Lune, who has launched a full-scale assault on all Orakians. Like his father, he can use swords, knives, and needlers, but cannot use techniques.

Ryan is the leader of the defensive line against Lune, despite being a Layan. He originally believes Nial to be an ally of Lune, but after the Layan general shows up to taunt them, he realizes that both Nial and him possess the same goal and joins Nial's party.

Laya (Laia in the Japanese version), is the younger sister of the legendary figure of the same name and the queen of the Kingdom of Mystoke. After Nial awakens her from a thousand year cryogenic sleep, she joins him in the hopes of finding out what became of her sister, who she remembers leaving with a warrior carrying a black sword. She is an expert technique-user and wields the same bow her older sister once used. If the player follows the path of Ayn or Aron, Laya joins the party in the third generation.

Lune was a general of Laya's forces. After his banishment by Orakio, Lune cryogenically froze himself for one thousand years. Upon awakening, he immediately began assembling an army of monsters in order to attain his revenge against the Orakians. His attack on Satera marked the beginning of a campaign to destroy all Orakian kingdoms.

Alair (Luise in the Japanese version) is Lune's sister who awoke with him from cryogenic sleep. During Lune's assault on the Orakian kingdoms, the kingdom of Divisia captured and imprisoned her. After being rescued by Nial, she immediately left to persuade Lune to stop his rampage.

Third Generation

Sean, the main character if Ayn marries Thea, is the Prince of Azura who lives on the moon with his parents until the satellite is attacked by Siren and collapses. Sean escapes and embarks on a quest to stop Siren and save his people. Being 3/4 Layan, he lacks the physical powers of the other scions, but trades it for high technique proficiency.

Crys (Noin in the Japanese version) is the main character if Ayn marries Sari. He lives in Landen until it is discovered that the world has suddenly shifted off course and directly towards a nearby sun. His quest is to determine a way to restore the planet to its normal path and save his people from certain destruction. Crys is physically the strongest third-generation scions due to being 3/4 Orakian, but as a result, he only knows a few techniques and no healing powers.

Aron (Ruin in the Japanese version) is the main character if Nial marries Alair. He lives on the satellite Dahlia with his parents, his uncle Lune, and his cousin Kara. At the beginning of his quest, his people come into contact with a ship called the Neo Palm, but witness its destruction at the hands of unknown forces. He leaves the satellite with Kara to investigate the mysterious attack. Aron, 1/2 both Orakian and Layan, is good with a sword and knows several techniques. He is the only protagonist in the game with a unique walking sprite. The other descendants of Rhys simply have a palette swap of either Rhys' sprites or Lyle's sprites.

Adan (Fuin in the Japanese version) is the son of Laya and Nial and is the prince of Landen, Satera, and Mystoke. When earthquakes ravage their kingdom, he and his twin sister, Gwyn, set out to discover the origin of the tremors. Adan, being of equal Layan and Orakian ancestry, is skilled in both swordplay and techniques.

Gwyn (Laia in the Japanese version) joins her brother on the quest to find the source of the earthquakes after having a nightmare. Unique amongst all the game's characters, she can peer into the future through her dreams. Gwyn also inherits her mother's healing techniques and her skill with a bow.

Kara (Luna in the Japanese version) is the daughter of Lune. Her appearance and abilities vary depending upon the story path chosen by the player. In the arcs of Sean and Crys, she is an embittered warrior, and due to her father's apparent unwillingness to fight, joins them in the quest to find the true origin of the conflict. Despite being a full-blooded Layan, Kara is not skilled in the use of techniques. Instead she relies on her father's legendary slicer to aid her in combat. In the arcs of Aron and Adan, she is mild-mannered and delicate. Unlike her counterpart, she is a skilled technique user, but is also effective with a slicer.

Secondary Characters

Miun is an ancient Mieu-type cyborg who once fought alongside Orakio, along with Siren. Heavily damaged from an unknown conflict, she now randomly wanders around the desert of Aridia, kept functional only by her desire to see Orakio one more time. Her memories are damaged, but she clearly recalls Orakio's sword. When one of the third-generation heroes approaches her with the sword in their possession, she believes them to be Orakio himself. Having seen him again, she shuts down, passing on her legendary claw to Mieu.

Rulakir is Orakio's twin brother. His own family was killed long ago during the wars, and his hatred has kept him alive all this time. Consumed by darkness, you must kill him to free him, and yourself, as he bars your path to the final confrontation.

Dark Force is the evil from legends. Trapped under the waters of Landen by Orakio's sword, you free him wholly when you recover the sword, and must destroy him to release Alisa III from his terror.

Praise was given to Phantasy Star III for its unique "generational" gameplay and characters. Others thought it was just too "different" in style from its peers. Critics cite the only subtle differences between the endings, lower quality battle animations, and the fact that it did not resolve the perceived cliffhanger ending of Phantasy Star II. Still, it maintains above average ratings, with an overall score of 70% on the aggregate site Game Rankings.

The game was reviewed in 1991 in Dragon #176 by Hartley, Patricia, and Kirk Lesser in "The Role of Computers" column. The reviewers gave the game 4 out of 5 stars. They noted that they "didn't like it as much as Phantasy Star II" but still praised Phantasy Star III for being "creative in many ways," including the choices of who to marry, the different possible endings, and the "longer play life" that this allows.Electronic Gaming Monthly gave the game a score of 8 out of 10.Nintendo Power named it the series' "lackluster third installment" and noted that series co-creator Rieko Kodama did not work on it. The game's icon-based menu system later inspired a similar menu system in Shining in the Darkness (1991).

The only downside according to MegaTech magazine was that "it costs a massive £50!" Mega placed the game at #12 in their Top Mega Drive Games of All Time.

A well-known trick can be found at the start of the game. Before meeting Maia and setting the wedding sequence in motion, if the player acquires and uses an Escapipe while Rhys is locked in the dungeon, all will be as it was before the kidnapping. However, the story will not advance and the player cannot leave the town. The King will say "You used your Escapipe! Normally a smart move, but now I'm afraid the game can't be continued. Please press the reset button and try again." Since the player starts out with no meseta, Rhys' boots have to be sold in order to buy the Escapipe.

The Japanese Mega Drive version of Phantasy Star III contains parallax scrolling in all battle backgrounds. This was removed in the Genesis and PAL versions of the game.