Siege of Avalon takes place in the fictional land of Eurale. Within Eurale are seven kingdoms: Nisos, Aratoy, Oriam, Fornax, Elythria, Cathea, and Taberland. The seven kingdoms united into an uneasy alliance and built a citadel as a meeting place, which was named Avalon.

Within the land is a civilization of nomads known as the Sha'ahoul. Their religion values very highly the earth and nature and therefore they are against farming, the building of permanent structures, and similar practices which they feel destroys the earth. After discovering the existence of Eurale, they declared war on the seven kingdoms to eradicate their way of life.

Many refugees of the destruction caused by the Sha'ahoul took shelter in Avalon. The seven kingdoms sent military support to defend Avalon and the refugees. To the people of Eurale, Avalon is seen as the last hope at stopping the Sha'ahoul. The Sha'ahoul and their leader, Mithras, chose to overtake the citadel by setting up a siege around it.

The game begins with an entry in the hero's journal. The siege has been going on for several years. His brother, Corvus, serves as part of the military in Avalon. When their father dies, the hero feels that it is his obligation to inform Corvus of the sad news, so he becomes part of the crew of a ship sailing from Elythria to Avalon to deliver supplies. The Sha'ahoul manage to sink all of the ships except the one the hero is on. The ship reaches Avalon, but has lost most of its supplies. It is not possible to make a return voyage to Elythria and so the hero decides to stay at Avalon, inform Corvus of their father's death, and help out Avalon in whatever manner he can. The player gains control at this point and begins by speaking to Corvus and informing him about his father's death.