Combat takes place in real-time, with the protagonist and a chosen Follower fighting enemies either individually or in groups. Enemies range in type from normal humans to monsters and spirits. Attacks are divided into normal; heavy attacks, which take longer to execute while dealing higher damage; and area attacks, which damage multiple surrounding enemies. In addition to blocking, the protagonist and enemies can dodge attacks. The protagonist has access to different techniques, which range from purely offensive or guard-breaking techniques to healing and buffing techniques. Some fighting styles are hand-to-hand, while others are tied to a weapon type. In the console version, techniques are assigned to four face buttons, while the PC version has techniques assigned to number buttons. Magic-based attacks and techniques require Chi to function. Activating Focus during combat slows down time, allowing the protagonist to attack more freely as long as their Focus lasts. Defeated enemies can drop health and Chi.
Dialogue choices are tied into the game's moral alignments, called "Open Palm" and "Closed Fist". Neither path is meant to be based around good and evil, with their morality being based on a character's intent. The Open Palm primarily revolves around altruism, while the Closed Fist believes in self-reliance and can consequently be a more violent path. Selecting dialogue choices aligned to either the Open Palm or Close Fist paths alter how party members and NPCs respond to the protagonist, with a major choice during the final part of the game impacting the protagonist's alignment and the story's ending. Related to this is the ability to romance certain party members; out of two female and one male follower, one female and one male can be romanced by either male or female protagonists, while the second female can be romanced by a male. There is also an option to romance both females by a male protagonist, resulting in a love triangle situation.
Plot
Shortly after completing their training at Two Rivers, the Spirit Monk helps fend off an attack by a Lotus Assassin, facing undead opponents in the process. Master Li reveals the Spirit Monk's past, his own identity as Sun Li and role in the destruction of Dirge, and the increasing threat of the undead that is tied directly to Emperor Sun Hai. During a final training session to recover an amulet of their people, the Spirit Monk meets the spirit of the Water Dragon, who reveals that Sun Hai has incapacitated her and left the Spirit Monk as the land's only hope. Master Li's preference for the Spirit Monk pushes the impatient Gao the Lesser over the edge, leading to his expulsion. Gao the Lesser then kidnaps Dawn Star and summons Lotus Assassins allied with his father Gao the Greater. The Spirit Monk rescues Dawn Star and defeats Gao the Lesser with help from Sagacious Zu, but the Lotus Assassins—led by Death's Hand and his second-in-command Grand Inquisitor Jia—destroy Two Rivers and capture Master Li.
Using one of Gao the Greater's airships, the Spirit Monk travels to the village of Tien's Landing. During their time there, they fight and defeat Gao the Greater and learn that Master Li was taken to the Imperial Capital. While there the Spirit Monk finds two missing pieces from their amulet, acquires a map of wind currents that will allow passage to the Imperial Capital, and helps the village by purging the neighbouring Great Southern Forest of a corrupting force and closing a large dam, which allows trading vessels to navigate the river again. They are also joined by Wild Flower, who guarded one of the amulet fragments; Black Whirlwind, who was hired to eliminate the monsters in the Great Southern Forest; Sky, who was freeing slaves taken by the Lotus Assassins; and Kang the Mad, who was held captive by Gao the Greater. They are also first attacked and then aided by Silk Fox, who is determined to topple Death's Hand.
Using Kang's special airship, the party travel to the Imperial Capital, where Silk Fox meets them in her true role as Princess Sun Lian. While in the Capital, the Spirit Monk gains access to the Lotus Assassins' ranks by competing in a local fighting tournament. Once among the Lotus Assassins, they dismantle them from within before retrieving the final amulet fragment from Grand Inquisitor Jia. Death's Hand then attacks, but Sagacious Zu sacrifices himself to collapse the Lotus Assassin base on Death's Hand. Led by Silk Fox, the group then infiltrate Sun Hai's palace, confronting the Emperor as he interrogates Master Li and finding him withered through using the Water Dragon's stolen power. After defeating him, Master Li kills the Spirit Monk and steals both the completed amulet and the Water Dragon's power, setting himself up as the new Emperor.
The Spirit Monk is guided back to the living world by the Water Dragon and the ghost of Dirge's abbot, who reveals the truth about Master Li. Sun Li—who orchestrated the entire siege—had conspired with his brothers Sun Hai and Sun Kin to seize the Water Dragon's power and kill Sun Hai. The brothers' plot fails as the Water Dragon's power made Sun Hai immortal. Sun Kin was killed, while Sun Li barely escaped and killed the Spirit Monk's rescuer to use them as a weapon against Sun Hai. Death's Hand was created by the Emperor by binding Sun Kin's spirit to Sun Li's armor. Returning to life in Dirge, the Spirit Monk reunites with their companions and holds off a vast assault from Sun Li, who also sensed their return. Infiltrating the Imperial Capital, the Spirit Monk's party fights their way through the palace and discovers the Water Dragon's body, torn open and preserved in limbo to provide endless water to the Jade Empire. The Spirit Monk then goes to confront Master Li.
Depending on the player's choices at these points, one of several endings plays out. If the Spirit Monk surrenders to Sun Li by not fighting him, they are remembered as a hero who knew their place, as the Empire becomes an oppressive dystopia under Sun Li's rule. If the Water Dragon's corpse is further corrupted by the Spirit Monk, then they usurp Master Li's stolen power and emerge as the next Emperor following his death. If the Spirit Monk destroys the Water Dragon's body, then her spirit is freed, and the dead are able to find their way into the underworld, causing the people to rejoice and hail the Spirit Monk as a hero of the Jade Empire.