Ninja Gaiden III: The Ancient Ship of Doom takes place between the events of the original Ninja Gaiden and Ninja Gaiden II: The Dark Sword of Chaos. The story opens with Irene Lew, one of the protagonists in the first two Ninja Gaiden titles, an agent for the Central Intelligence Agency on a mission called "Cardinal". She gets chased to the edge of a cliff by a man who looks like Ryu Hayabusa, when the edge gives way, and Irene falls in the water to her apparent death. Ryu is accused of Irene's murder but says it was not him, that it was somebody else who looked like him who tried to frame him. He first investigates a laboratory that Irene was investigating. After going through the laboratory, a mysterious man appears and tells Ryu to go the Castle Rock fortress, where he will give Ryu more information about Irene when he gets there.

On his way to the outer limits of Castle Rock fortress, Ryu encounters Foster, who was the head of the CIA's Special Auxiliary Unit in the first Ninja Gaiden game, via a video image. After saying that nobody has ever made it through the fortress' defenses alive, Ryu inquires about Irene, to which Foster replies: "I don't know what you're talking about." Ryu vows to push on, Upon reaching the foundation of Castle Rock fortress, Ryu encounters his "original", or a person designed to look like Ryu, and finds out that is was he who killed Irene. They both thrust themselves at each other, and afterwards look-alike tells Ryu that he has gained all of his powers. The look-alike flees, saying that Foster ordered him not to eliminate Ryu quite yet.

When Ryu reaches Castle Rock fortress, he encounters the stranger whom he met after his trip to the laboratory, who reveals his name as Clancy. He tells Ryu about a project he and Foster have been working on called the "Biohazard plan". Clancy says that he can no longer work with Foster. He said Foster was designing creatures called "bio-noids" – transformed superhumans that are infused with "life energy" that flows from an interdimensional rift that appeared after the demon from the first Ninja Gaiden game was defeated. He explained that this rift appeared at the site of the Castle Rock ruins, in which Foster rebuilt in order to harness this power. Clancy reveals that it was a bio-noid that killed Irene, and that Foster controls the bio-noids; he pleas to Ryu to stop Foster. After making his way into the fortress, he encounters Foster and the look-alike. Foster vows to eliminate Ryu and use the life energy from the rift and Ryu's secrets of the Dragon Clan to make him into an all-powerful bio-noid. Just as Foster and the look-alike advance on Ryu, Irene appears, to the amazement of both Ryu and Foster, and is armed with a machine gun; she was working with the army with regards to Foster's plan. The look-alike then transmutes into a bio-noid, which Ryu defeats.

After the defeat of the look-alike bio-noid, the door to the interdimensional rift throws wide open, and Clancy appears, telling Ryu, Irene, and Foster that they were all used as pawns in his plan to take over the ruins and claim all the life energy as his. Foster tries to follow Clancy through the door, but the energy tears him apart and is destroyed. Ryu instructs Irene to stay behind while he goes through the rift into the subspace, as he knows that he will be protected from the power that is inside. Ryu encounters the look-alike bio-noid again while inside the subspace, who was resurrected and transmuted into a super creature. After he defeats the look-alike, Ryu is instantly teleported into a room, where he meets Clancy once again. He tells Ryu that he has already claimed the life energy as his and explains the truth behind Castle Rock – that the ruins are a dimensional warship called the "Ancient Ship of Doom". He says that "these super-dimensional ruins are the foundation upon which a new world will be created", and that it will now be where all new life will originate from. The ship reappears in the real world, and Clancy then fires a test shot from the ship into the distance to demonstrate its power, which Irene watches in horror. He then drops Ryu through a trap door to the outside of the ship.

Ryu fights back to the inner chambers of the Ancient Ship of Doom, where he prepares to engage in the final showdown against Clancy, who has now transmuted into a super bio-noid. Clancy offers Ryu to have him and Irene work for him by his side wipe out the human race and usher a new age, but Ryu refuses and commences with the final battle. After transforming twice into progressively-stronger versions of himself, Clancy is defeated by Ryu, and Ryu is transported outside the warship and back to Irene; they both watch as the Ancient Ship of Doom is brought down and explodes, and they witness the crumbling of Castle Rock fortress. In the aftermath, Ryu tells Irene that Clancy's and Foster's plan have been foiled, and that mankind will live on and refuse to be part of anyone's evil plans; he adds that mankind would never stoop to a level in which they would completely destroy themselves out of mere ambition. The two watch as the sun rises and as a new day begins.

Ninja Gaiden III: The Ancient Ship of Doom was developed and released by Tecmo, who also did the previous two games in the series, Ninja Gaiden and Ninja Gaiden II: The Dark Sword of Chaos. It was released in Japan on June 26, 1991 (1991-06-26) for the Famicom under the title Ninja Ryūkenden III: Yomi no Hakobune; it was released in North America for the NES in August 1991. It was ported to the Atari Lynx in 1993 by Atari, and then Tecmo re-released the game as part of its Ninja Gaiden Trilogy Super NES compilation in 1995. It was released for the Wii's Virtual Console service in North America on February 18, 2008 (2008-02-18).

Ninja Gaiden III was designed by Masato Kato, who took over Hideo Yoshizawa's main role in the game's development from the previous two titles; In an interview with Kato, he said that Ninja Gaiden III needed "to go into a new direction". The game was given more of a science-fiction motif as opposed to the Cthulhu Mythos motif in the previous two titles; the enemies changed to look more robotic than in the previous games. The original intent from the developers was to make the game easier than the previous titles, "to create a game a normal player can enjoy". However, the perceived popularity of difficult video games in North America caused Tecmo to release the game for the NES with a much higher difficulty level than the Japanese version. They also decided to place the events of Ninja Gaiden III between the events of the first two titles in order to maintain continuity; they figured that it was too difficult to continue the story after Ninja Gaiden II: The Dark Sword of Chaos, so they developed the plot sometime before the events of Ninja Gaiden II that revolved around the game's main antagonist, Foster.

Ninja Gaiden III: The Ancient Ship of Doom received preview coverage in video gaming magazine Electronic Gaming Monthly, where it was displayed at the Consumer Software Group trade show in Tokyo on March 24–25, 1991. They said that Ninja Gaiden III was the best Famicom game in display there, that it "easily walked away with the best for this system!" The game was also previewed in the July 1991 issue of Nintendo Power. They said that the game contained all the old features of previous Ninja Gaiden games which included ninja arts (but they lamented at the lack of the "jump and slash", absent from Ninja Gaiden II: The Dark Sword of Chaos) and similar usage of cinematic cutscenes that made the original Ninja Gaiden game popular. They also particularly praised the new moves Ryu had as well as an excellent plot.GamePro magazine previewed the game in August 1991. They said that the game's visuals were good and on par with the previous titles and that the scrolling was great.

The game was featured in Electronic Gaming Monthly's July 1991 issue as an "EGM Exclusive". They praised the game, saying "Ninja Gaiden gets better every time!" It was also one of the featured games in the August 1991 issue of Nintendo Power, where it received 11 pages of coverage, which included a full walkthrough of the first four Acts plus a brief plot overview of the entire game. It was in this issue where Ninja Gaiden III was purported to be the final Ninja Gaiden game by Tecmo. As in their preview, they gave praise to the action, gameplay, elaborate plot, and difficulty.GamePro reviewed the game in its September 1991 issue. The magazine gave the game top ratings in all categories except sound. They noted the difficulty level as being dictated by the enemies' strategic placements in the various environments; they added that while Act 1 is easy, the remainder of the game is very difficult. The review praised the usage and usefulness of the secondary weapons, Ryu's new ability to hang overhead, and the new addition of the sword power-up, which it said bore resemblance to the game Strider. They slightly criticized the game for leaving out the "cloning" power-up from Ninja Gaiden II: The Dark Sword of Chaos as well as the limited continues and lack of passwords. In March 1992, Ninja Gaiden III received three nominations in the "Nintendo Power Awards '91" in the following NES-related categories: "Best Graphics and Sound", "Best Challenge", and "Best Overall". It won in the "Best Challenge" category; the magazine commented that "the game-playing public knows a challenging game when they see one!" It placed second in the "Best Graphics and Sound" category, finishing behind Battletoads for the top spot. It was the ranked as the third "Best Overall" NES title for 1991, finishing close behind Tecmo Super Bowl.

The Atari Lynx version of Ninja Gaiden III also received coverage in various magazines in 1994. In GamePro magazine, they criticized the fact that the Lynx's small screen makes it difficult for players to see the various power-ups and enemies and to use secondary weapons. However, they praised the good controls, and they said the sound was fine though "weird and spacy".VideoGames & Computer Entertainment praised the game for being better than the arcade version that was previously ported to the Lynx, but they were disappointed that Tecmo did not port the first two NES Ninja Gaiden titles to the handheld, as well.Electronic Gaming Monthly praised Tecmo for a good translation of the game from the NES to the Lynx – complete with good graphics, controls, and varied gameplay – while saying that "Ninja Gaiden [III] is a game that the Atari Lynx has been longing for". Despite that, the reviewers noted that the Lynx's small screen made all the sprites too small for most players to see well, and the screen's blurring makes it frustrating for players to track character movements. In a retrospective review, Allgame gave a mostly negative review, saying that the background makes it difficult to see foreground elements, that players cannot see their character or what power-ups they are collecting, and that sound is very poor, saying "thirteen banshees all wailing different, off-key songs would only begin to approach just how bad the music is".

A few modern video gaming websites reviewed Ninja Gaiden III upon its release to the Virtual Console in 2008. Nintendo Life's Damien McFerran gave lackluster ratings, saying that the game "passed under the radar of many a videogame enthusiast". He added that while the presentation was great, he pointed out flaws in the "silly" plot, the inconsistently laid-out level designs, and frustrating difficulty in addition to the five-continue limit. He said that many gamers would prefer the previous two Ninja Gaiden titles over this one.IGN's Lucas Thomas appreciated the improvement in Ryu's ability to scale and climb on top of walls, his ability to hang overhead, good storyline, and the new items such as the Dragon Sword power-up and the Vacuum Wave. His chief criticism was the game's difficulty, saying that it's not the "rewarding kind of difficult" but instead "the cheap, annoying kind of difficult that makes you want to throw your controller at the TV screen and just go read a book". As with the Nintendo Life review, Thomas similarly criticized the inconsistent level design as well as a storyline which becomes progressively more bizarre, including "weird science-fiction themes about bionics and clones".

In a retrospective of the Ninja Gaiden series, Eurogamer said that Ninja Gaiden III was the only game in the NES trilogy not to make it to Europe. They made similar criticisms about the difficulty level, saying that the North American version was made more difficult than the Japanese version by utilizing limited continues, making the enemies much more powerful, and removing the password system present in the Japanese version. They said the story was too outlandish, calling the plot, of which a short-lived anime Ninja Gaiden series would loosely be based, "a glorious load of old bollocks". While the version from Ninja Gaiden Trilogy for the Super NES remedied most of their criticisms, they said that the game added new frustrations which included slower framerates, lower-quality controls, and the omission and shuffling around of several tracks, which they said "is precisely the sort of thing that makes die-hard videogame fans apoplectic with rage".