Dynasty Warriors 3 is set across Ancient China in the time of the Three Kingdoms era. The game begins at the fall of the Han Dynasty shortly after the death of the Emperor Ling when the leader of the Way of Peace, Zhang Jiao, led an uprising against the Empire.

The game features a strong mix of fact and fiction from Chinese History and often exaggerates characters and their personalities, for example Lu Bu is portrayed as a virtually unbeatable, violent maniac. Most of the events and stages are reported to have occurred in the Three Kingdoms era during the struggle of power. The three kingdoms primarily involved, Shu, Wu and Wei, each sought power enough to overthrow the other two and unify China under their rule. Although the story in Dynasty Warriors is not perfect in the sense that it does not accurately follow the historical events, it has been changed to make the game more playable and less repetitive. For example, a number of the characters in the game died in the time frame that the game is set, but they still appear in later stages. The game features environments resembling that of Ancient China and various items from the era such as Fairy Wine and Dim Sums.

It also touches on Mysticism as some characters (Zhuge Liang, Sima Yi, Pang Tong) have either magical elements in their attacks or completely magical attacks.