Palace of Magic is a platform game. Combining platform elements with problem solving, it similar gameplay to the earlier Citadel. Both are early examples of the Metroidvania genre.

The game begins with the player character in a palace, having been shrunk and taken out of your normal place and time by an evil wizard called Caldeti (an anagram of Citadel). The objective is to magically restore the character to his original size and find the teleporter to their home world. This involves moving through the Palace and other locations such as a church, woods, and dungeon, overcoming obstacles and enemies along the way.