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 GNOMES OF UDNALOR: Part I
Upon entering the deep underrealm of Udnalor, one must first pass through the upper halls, which were the residences of the gnomes in days of past glories. Now they have abandoned the fading tapestries to the worms and moles, and an uncanny silence reigns, laid over the oaken tables like the thick layers of dust and humus.
There may be creatures which now inhabit these areas: nests livid with giant maggots, rats and other vermin.
The watchtowers and passageways which lead to the Overground are frequently trodden, however. After all it takes a great many small humanoids to hoist a single giant rabbit corpse back through the fathoms of earth.
The gnomes primarily hunt giant rabbits with bows and arrows tipped with the subterranean poisons concocted by their best alchemists.