Final Fantasy XII is set within the land of Ivalice during an age when "magic was commonplace" and "airships plied the skies, crowding out the heavens". At this time, magicite, a magic-rich mineral, is commonly used in magic spells and in powering airships—a popular form of transportation in Ivalice. Ivalice is divided into three continents:[30] Ordalia, Valendia, and Kerwon. Ordalia is located in the western part of Ivalice. The Rozarrian Empire makes its home in the vast inland plains of this continent as the eastern portion of it is largely desert or "jagd"—lawless lands so rich in Mist (the ethereal manifestation of magicite) that airships cannot fly over them. Valendia is the home of Imperial Archadia, where vast and lush plains dot the landscape. Central to the story is Dalmasca, a small kingdom between the two continents and Empires. Located in the middle of the Galtean Peninsula of Ordalia, Dalmasca is surrounded by an expanse of desert. The temperate climate of Dalmasca differs from the cold environs of Kerwon and the lush plains of Valendia and Ordalia. During this time, Ivalice is beset by the pending war between the forces of Rozarria and Archadia. Caught between the two powerful Empires, Dalmasca and a number of smaller nations have already been subjugated by Archadia two years before the game begins.

According to the game developers, design inspiration came from a mix of medieval Mediterranean countries as demonstrated by the architectural styles found throughout Ivalice along with many of the races populating the region. The art team visited Turkey, which influenced the game’s Mediterranean-style setting. The developers also used styles and deco from other sources including areas in India and New York City. Of note is the use of Sanskrit in the city of Bhujerba. Phrases such as "Svagatam" (welcome) and titles like "Parijanah" (Guide) are lifted directly from Sanskrit. Hideo Minaba, a developer and co-art director with Isamu Kamikokuryō, mentions that the team tried to bring out Arabic culture in the design of the game. War is a predominant theme of the game and the developers confirmed that the cutscene battles are influenced by Ancient Rome.[36] When asked to comment on the fan observation of Star Wars influence, Minaba assured that although he was a fan of the Star Wars series, it was not necessarily an influence to the game's designs

Final Fantasy XII begins in Dalmasca's capital city of Rabanastre, where the happiness from the union of Princess Ashe of Dalmasca and Prince Rasler of Nabradia is interrupted by the Archadian Empire's invasion of Dalmasca. In the subsequent war, Nabradia and Dalmasca are subjugated by Archadia; among the lives lost is Prince Rasler. The Dalmascan king, Raminas, who is forced to sign a treaty of surrender, is slated to be assassinated. A rescue attempt by Dalmascan knights backfires when Basch, one of the leading knights, kills Raminas and Reks, a young 17-year old knight who was with the knights during the attempt. The treason of Basch, and Ashe's eventual suicide, are announced by Marquis Ondore.

Two years later, Vaan, Reks's younger brother, infiltrates the Rabanastre palace during the dinner to celebrate the appointment of Vayne as Consul, despite Penelo's objection. During the infiltration, Vaan encounters Balthier and Fran, who introduce him to magicite. Their escape attempt backfires when Resistance forces storm the palace, landing them into the sewers where they stumble upon the Resistance leader, Amalia. However, Vaan, Balthier and Fran are captured by the Archadians and detained at the Nalbina Dungeons. In Nalbina, the trio encounters Basch and learns of the existence of his twin, Judge Magister Gabranth, and eventually escape with him. Basch conveys to Vaan that Gabranth had posed as him to blackmail Ondore.[44] While skeptical at first, Vaan finally believes him,[45] and helps Basch reach Bhujerba with the help of Balthier and Fran. They also learn of Penelo's kidnapping by headhunter Ba'Gamnan, who uses her to lure Balthier to him. This brings them to a meeting in Bhujerba with Lamont, a curious boy who is in truth Vayne's younger brother, Larsa.[46] Basch was also able to confront the Marquis, who captures the party to be sent onboard the Archadian airship, Leviathan, headed by Judge Ghis. Ghis took Vaan's magicite - the Dusk Shard - to be sent to Archadia.

On the Leviathan, the party is reunited with Amalia, revealed to be Princess Ashe;[47] and Penelo, who had been rescued by Larsa. Escaping the airship and unable to convince the Marquis to prove her royal lineage,[48] Ashe, driven by visions of Rasler, attempts to collect the Dynast-King Raithwall's treasures to prove her royal blood. The Dawn Shard, a form of magicite called deifacted Nethicite obtained from Raithwall's Tomb and seized by Ghis, proves to be fatal as the small stone destroys the Leviathan, Ghis, and his fleet. Now unable to use the Shard, Larsa convinces Ashe to seek Gran Kiltias Anastasis, who lives in Mt. Bur-Omisace, for his approval of her as queen of Dalmasca. Vaan and Penelo travel with the entourage, which includes Basch, Balthier, and Fran. On the way, the party rescues Fran's sister, Mjrn, who was possessed by manufacted (artificial) Nethicite in the process.

The party learns in Mt. Bur-Omisace that not all parties are wishing for war. Larsa, who had been investigating Vayne's connection with the manufacted Nethicite, had made contact with Al-Cid Margrace, a member of the Rozarrian Empire ruling family, to convince the two Empires to cease their war. Their plan to announce Ashe's status as Dalmascan Queen and to persuade Gramis for peace was forestalled with the Emperor's death at the supposed hands of the Archadian Senate Chairman, Gregoroth. With Anastasis' aid, Ashe retrieves the Sword of Kings, which can destroy Nethicite. While she obtains the sword, Anastasis is killed by Judge Bergan and Larsa is brought back to Archadia. After defeating Judge Bergan, Ashe's party travels to Archades and the Draklor Laboratory, where manufacted Nethicite were made by Dr. Cid's research. There, they encounter Reddas; however, Dr. Cid escapes and leaves clues that lead them to Giruvegan, the supposed location of the Sun-Cryst, the source of deifacted Nethicite. While together able to enter Giruvegan, Ashe alone encounters the makers of the Sun-Cryst, the Occuria, receiving the real location of the Sun-Cryst, and the Treaty Blade to cut her own piece of deifacted Nethicite.

The Archadian Empire's might, led by Vayne, was due to Dr. Cid's Nethicite research and the assistance of the Occuria betrayer, Venat. Vayne aims to become the new Dynast-King by using manufacted Nethicite to conquer all of Ivalice. Dr. Cid, revealed to be Balthier's father, was obsessed with researching the Nethicite's power after his own visit to Giruvegan and initial encounter with Venat. Their expansion campaign which led to the Nabudis' destruction and Dalmasca's occupation was made to obtain and study the royal heirlooms - deifacted Nethicite. Gabranth was sent to Giruvegan to ascertain Ashe's intentions for war. With the Occuria's clue to the Sun-Cryst, Ashe travels to the Pharos at Ridorana Cataract, accompanied by Reddas. Finding the Sun-Cryst atop the tower, Ashe resolves to destroy the Sun-Cryst, defeating Gabranth, who admits to killing her father, and Cid, who enhances the power of the Sun-Cryst before dying. Reddas, burdened with guilt for the destruction of Nabudis, sacrifices himself to destroy it using the Sword of Kings.

Ashe learns from Al-Cid that an impending war between Archadia and the Resistance group led by Marquis Ondore, who defied the Empire after the Leviathan incident, is about to take place in Rabanastre. The party travels home to find Archadian forces strengthened with the Sky Fortress Bahamut - an enormous, nethicite-fuelled airship armed with incredibly powerful weapons. Infiltrating the sky fortress with the aid of the Resistance, Basch confronts Gabranth, who spews hate towards his twin, yet taken by Basch's loyalty. The party encounters Vayne and Larsa, the latter objecting to Vayne's plot for power; Larsa and Gabranth ally with the party to destroy Vayne after Venat infused its power into him. The war ends with an announcement by Ashe, and with Larsa taking over the Imperial Army. The party escapes Bahamut, now void of its fuel due to the final battle, with Larsa and the body of Gabranth. Balthier and Fran remain onboard the Bahamut, steering it away from Rabanastre to prevent a collision, though contact with them was lost.

One year later, Ashe has become Queen of Dalmasca and her coronation is about to take place in one month's time; Basch replaces Gabranth as Judge Magister due to the latter's request, serving as guardian to Larsa, now Emperor of Archadia. The story ends with Vaan flying his own airship with Penelo after Balthier and Fran return to 'steal' the Strahl. They leave Vaan a message which includes a note to Queen Ashe and also her ring that Balthier took from her earlier in the story, this is then delivered to Ashe. Following this, Vaan and Penelo set out in an airship to visit Balthier and Fran in Bervenia

The six main playable characters in Final Fantasy XII are Vaan, an energetic orphan of Rabanastre who dreams of becoming a sky pirate; Ashe, a determined princess of Dalmasca who lost her husband in the Archadian invasion; Basch, a disgraced knight of Dalmasca charged with treason for slaying the king; Balthier, a gentlemanly sky pirate who pilots his airship, the Strahl; Fran, Balthier's partner and a Viera exile whose knowledge extends to legends and myths; and Penelo, Vaan's childhood friend who accompanies him in journeys to keep an eye over him.

The Archadian Empire is ruled by House Solidor, headed by Emperor Gramis. The family also consists of two siblings, Vayne and Larsa, the former a militaristic genius and the latter a charismatic seeker of peace. Judge Magisters, upholders of Archadian law, protect House Solidor and execute every command and order issued by the ruling family. The technological marvels of airships and synthetic nethicite—a form of magicite that absorbs Mist—are thanks to Dr. Cid, a prominent researcher from Archadia.[39] The Resistance against Archadia includes Dalmascan knight Vossler, an ally of Basch; Marquis Halim Ondore IV, the game's narrator and ruler of the skycity Bhujerba; Reddas, a sky pirate based in the port at Balfonheim; and the Rozarrian Empire, of which Al-Cid Margrace is a prince of the ruling family. The mythos of Final Fantasy XII revolves around a character known as Dynast-King Raithwall, the man who once united Ivalice to create the Galtean Alliance.

Basch was initially meant to be the main character of the story, but the focus was eventually shifted to Vaan and Penelo when the two characters were created later in development. The development team explained that their previous game, Vagrant Story, which featured a "strong man in his prime" as the protagonist had been unsuccessful and unpopular; the change regarding Final Fantasy XII from a "big and tough" protagonist to a more effeminate one was thus decided after targeting demographics were considered. With the casting of dorama actor Kouhei Takeda for the voice acting and motion capture, Vaan nevertheless became a little less feminine and more "active, upbeat bright and positive" than planned. Comments were made about the similarity between main character designer and background design supervisor Akihiko Yoshida's creations and those of Tetsuya Nomura, another Square Enix character designer. Yoshida feels this connection is sparked by the style of color used by both artists, which involves a color consistency between the characters and the environments. The designers stated that non-human characters and races feature a prominent role in the game, which was influenced by an interest in history among the developers.