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.
With regard to the plot "Sleeping Mines of Elathon":
You manage to get the water wheel in the mine working which operates a pump to clear the flooded lower levels. As you explore the dank tunnels of the lower galleries, you can hear the creaking of the wheel above. You enter a low-ceilinged passage and are crawling on your backs, when the creaking stops. The water starts seeping wetly around the back of your head...