Over two thousand years ago, the Dark Lord Sauron forged the One Ring to control the other rings of power given to the races of Middle Earth. Sauron was defeated in battle by the human king Isildur, who refused to destroy the ring and took it for himself. Eventually the ring ended up in the hands of Frodo Baggins, a young hobbit from the Shire. Frodo eventually learns that the only way to destroy the ring is to throw it into the lava river of Mount Doom, where it was forged. Thus begins a long and perilous journey, during which the fate of Middle Earth will be decided.

LEGO The Lord of the Rings follows the quest of Frodo Baggins and the Fellowship of the Ring from Hobbiton to Mount Doom. It is based on The Lord of the Rings by J.R.R. Tolkien, but is largely influenced by the movies directed by Peter Jackson. The looks of the character and the presentation of the story are directly taken from the three movies: The Fellowship of the Ring, The Two Towers, and The Return of the King. This instalment in the Lego universe games includes spoken dialogues within its humorous narrative.

Instead of a hub like in many Lego games, the core of the game is the actual map of Middle Earth, where the player's party, varying through the game, travels from town to town and region to region to explore, fight enemies, solve puzzles and find treasures. Through the main story, the player will have to play through story levels, in which each character's specific abilities and equipment are used to reach the end of the level. Once completed, each level can be replayed in Free Mode to find more treasures and find objects necessary to complete some quests (given by NPC's in the World Map) by using unlocked characters. A lot of treasures are Mythril blocks, which are used to craft tools that can be used by any character on the world map. This prevents the need for constantly switching between characters. Solving some puzzles will also unlock characters to acquire, quest-giving NPCs, and red blocks that will make some "extras" available.