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 Nomin gypsies have a fiddling competition every year, known as the Danse de Velose. Beaters hit out the rhythm on taut drums and the competitors start to play, slowly at first. Youngsters can compete, but are soon pulled away by worried mothers, before the competition becomes too dangerous. After two hours the haunting tune has become dazzlingly fast. You can resign at any time, but the moment you make a mistake you receive an arrow through the neck. Strings may snap, but the players must play on. The whole affair never lasts much longer than three hours, and the last fiddler playing is crowned king of the gypsies.