fantasy , n. 1. in general usage, a creation of the imaginative faculty whether expressed or merely conceived; as a fanciful design or invention, a chimerical or fantastic notion. 2. imaginative fiction featuring especially strange settings and grotesque characters; also fantasy fiction. 3. (gamerese) catch-all name for any game milieu directly or indirectly inspired by the pseudo-medieval Anglo-Saxon mythological setting of J.R.R. Tolkien's fantasy fiction; such milieux usu. feature quasi-medieval technology and social structure, terrain similar to that of medieval Europe, magic systems based on European Hermetics, and fantasy creatures from European mythology and/or Tolkien's literature. 4. any game milieu or fictionalized setting in which magic is a reality. [GJ1]

Addendum: Examples of games that take place in a fantasy milieu include: Advanced Dungeons & Dragons, Rolemaster, GURPS Fantasy , Earthdawn, Middle Earth Role-Playing (MERP), Tunnels & Trolls, and Palladium Fantasy RPG. Although technically "fantasy", occult-based games such as Call of Cthulhu and the World of Darkness games are usually not referred to by this term. [GJ1]