A young apprentice of the old Master Li, a martial artist in the town of Two Rivers, is close to complete his or her training, when a group of ghosts led by a mysterious person attacks the town. Master Li explains that the leader was a member of the Lotus Assassins, a special force serving the Emperor of the Jade Empire, who also happens to be his brother. The student is revealed to be the last in the line of Spirit Monks, whose abode was destroyed several years ago by the Emperor's army. The student ventures into a nearby cave to retrieve a part of an ancient amulet; meanwhile, the assailants burn down the town and abduct Master Li. The student and a few companions decide to go all the way to the Imperial Capital and explore the Jade Empire in order to rescue the master, find the truth about the past, and discover the dark secrets of the Empire's rulers.

Jade Empire is a role-playing game set in a fantasy world which has strong similarities to China of the Qing dynasty (within some steampunk elements), incorporating not only classical elements of Chinese culture, but also supernatural beings and forces. Similar to other BioWare RPGs (such as Knights of the Old Republic) in general concept and features, the game has overall simpler gameplay and a somewhat smaller world.

The combat in the game is action-based, relying on various martial art techniques and moves performed by the protagonist. The player has direct control only over the main character, although other characters join the party; one of them can be selected to help the protagonist in battles, either for purely supportive purposes or as an additional combatant. The player character has three attributes: Body, Mind, and Spirit, which control the secondary parameters of Health, Focus, and Chi, as well as the conversation skills Charm, Intuition, and Intimidation. Focus energy is needed to fight with weapons (swords and staves), while Chi is used to heal the protagonist or perform supernatural attacks comparable to magic spells. Experience points are obtained from completing quests and vanquishing enemies, and allocated by the player to increase the protagonist's aforementioned attributes.

Quest and conversation system bears more similarities to previous BioWare RPGs than combat and character customization. There are many side quests in the game, some of which can be solved through dialogue, applying the main character's conversation skills. Many quests, including plot-related ones, can be solved in different ways. The protagonist may embrace either of the two major philosophies of the Jade Empire, Way of the Open Palm or Way of the Closed Fist, roughly corresponding to "good" and "evil" ideologies, respectively. Pursuing one of these ideologies rather than hesitating between the two may award the player character with various bonuses. The protagonist can also romance some of the companions, including same-sex relationships.