A standard roleplaying environment: the tavern. This is another easy one to create in your own home, providing you have a large enough group of roleplaying friends. Let us assume your PC group is no larger than five, and that the rest of your friends can be NPCs. Let us also aim for an exceptionally seedy and unscrupulous city tavern.
In a good LARP it is desirable to separate the players out individually at some stage, because they are more suggestible and afraid when they are alone. Some form of individual challenge is probably the best way of doing this. One possible setting for this is a cave system, and it is probably one of the easiest to recreate realistically, and one of the most perfect for playing on fears of claustrophobia and darkness.
The runoff from Mount "Evil Volcano" has turned an area of small lakes below into a vision of hell. The mixture of acids in the lakes is of such strength that virtually any organic material touching is quickly dissolved. It is a melange of sulfuric, nitric and hydrochloric acids.
However, the place does harbor life, and its very strange, and very dangerous....