Like its predecessor, players take the role of a dungeon keeper, building and defending an underground dungeon from the would-be heroes that invade it, as well as from other keepers. In the game's campaign mode, the player is charged with recovering the portal gems from each area in order to open a portal to the surface.

Taken from the Wikipedia entry; "The game plays quite similarly to its predecessor, however gameplay is more streamlined with less micromanaging and elimination of unnecessary information. Examples include the removal of the "kill enemies"/"beat them unconscious" switch (creatures are always knocked unconscious - the behaviour can't be changed) and the creature statistics panel, which provided all sorts of generally irrelevant information like blood type and luck. The creature combat experience was also moved to display as a circular "progress bar" in the creatures "health flower" over their heads, removing the need to find the information in the panels. The colors, music and sound in Dungeon Keeper 2 also tend to be brighter and more vibrant; the original Dungeon Keeper was generally darker and "grimier" with more serious overtones. Dungeon Keeper 2 tends to be much more tongue in cheek with various fourth wall violating jokes. An example of the change in mood is when a creature hits jackpot in the casino. This releases a flurry of stardust springing from the room, while the game blasts Disco Inferno and the creatures in the casino dance around. The fact that this casino (together with the fighting pit) replaced the eerie Scavenger's Room from Dungeon Keeper solidifies the altered mood.

Like the original, Dungeon Keeper 2 places the player in the role of a malignant overlord bent on world domination. The player must conquer all the underground lands in the kingdom to recover the portal gems, which can be used to open a portal to the surface world so that it can be invaded by evil. The kingdom itself takes the form of a large table containing a 3-dimensional map where the player clicks where to attack next from the highlighted regions - this is quite similar to Dungeon Keeper's world map with mainly graphical improvements. There are 20 main levels in the campaign. Some levels have multiple methods of attack allowing the player to choose which method and subregion they prefer.

As in the original, the player takes on the enigmatic form of a large floating green hand which moves around the map picking things up, dropping them, casting spells and interacting with specific items. The game interface is blended between a large panel at the bottom of the screen and interactive items in the world. For example, the buttons to select which room, door or trap to build or spell to cast are in tabs on the panel and are then dropped into position in the world. Locking and unlocking doors or activating items is done by clicking on the item in the world. Disabling imprisonment of enemy creatures is done by clicking a metal bar next to the prison door, barricading it closed.

Gameplay is overseen by "The Mentor", an anonymous evil sounding male, voiced by Richard Ridings, just as in the original Dungeon Keeper, who tutors the player in the early levels and provides hints and advice throughout the game as well as general notices such as "It's payday" or "Your dungeon heart is under attack!". He also provides occasional humorous messages such as "One of your imps does a great impression of you. He can even do the ears!". The Mentor also provides a sometimes humorous monologue at both the objectives and debriefing screens for each level about the level goals and the characters involved. He also points out the movements of rival keepers and the king on the world map.

After completing a campaign level, the player receives a short movie before the debriefing screen which contains a joke based on the game.

Other than the campaign, the game also includes multiplayer and skirmish modes, as well as the sandbox mode, "My Pet Dungeon". My Pet Dungeon levels assign the player a goal such as "gain 10000 points" where points are gained by building, casting, claiming, slapping and just generally managing the dungeon. Once the player completes the objective they are then allowed to choose to keep playing on for as long as they like. The sandbox mode includes a "Hero toolbox" where the player can grab Hero characters and drop them in their dungeon for their minions to kill. The toolbox also includes a slot machine-like device for changing the skill level of the characters in the toolbox. The interface panel also gains a "force an invasion" button that causes a team of heroes to emerge from a Hero gate and attack the player's dungeon.

The skirmish mode enables the player to fight against computer bots. However, the difficulty of the bots is not particularly high, as the AI tends to have limited decision making and contingency planning abilities, but the bots are still generally challenging under favourable conditions, specifically, a sufficiently large quantity of land to build perfectly square rooms and a large quantity of nearby gold or gems."