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The story begins with Sonic the Hedgehog napping. Upon awakening, he reaches to check his clock and accidentally grabs a ring. Shahra, the Genie of the Ring, pops out of a book of Arabian Nights and into Sonic's world. She reveals that an evil entity from her world, the world of the Arabian Nights, Erazor Djinn is absorbing the power of the book and causing its pages and the world within to disappear. If he is not stopped, his power will be unleashed onto the real world unless the "Legendary Blue Hedgehog" told of in the stories can stop him. Shahra gives Sonic a ring that seals a contract between her and her new master. Sonic rubs it as instructed and is asked for a wish. He sneezes from a cold and humorously asks for a few handkerchiefs. After doing so, he wishes to travel into the world of the Arabian Nights and flies into the book on a magic carpet.
As Sonic travels inside the book's Tunnel of Pages, Erazor approaches Sonic and he is shot in the chest with a flaming arrow that is slowly burning out like a fuse. Erazor then tells Sonic that he will remove the curse if Sonic brings the seven World Rings which are scattered throughout the worlds in the book. If he fails to do so, the arrow will burn until it eventually extinguishes along with Sonic's life force. With his life on the line, Sonic heads off to locate the World Rings for Erazor and Shahra continues to go along on Sonic's journey, feeling guilty for getting him involved. Sonic sets off into the world of Arabian Nights intending to locate the seven World Rings, in hopes of understanding the mystery of their power.
The first place he searches is in the desert world of Arabian Desert to search for the sultan, King Shahryar, the main character of the Arabian Nights, who resembles Dr. Eggman. Sonic first thinks that Eggman is behind the entire plot to erase the Arabian Nights world and attempts to question him. Shahra stops him and neither she nor King Shahryar know who Dr. Eggman is. After a short talk, King Shahryar is swooped up by a "pterosaur" commanded by Erazor, which Sonic begrudgingly saves him from. This scene leads up to the next world, Dinosaur Jungle. Depending on what levels the player decides to go to, Sonic will either go straight to Dinosaur Jungle or go on farther into Sand Oasis to meet Ali Baba (whose real-world counterpart is Miles "Tails" Prower) and fight the world's boss, the Sand Scorpion who holds one of the seven World Rings Sonic must collect. After the Yellow World Ring is picked up from the remains of the monster, it is revealed that whoever gathers up all seven World Rings will be offered as a sacrifice to open a gateway between worlds.
After Sonic clears the world, he moves onto the Evil Foundry, a large, metal, industrial-like stage where Sonic confronts Erazor, who summons the Ifrit Golem, a gargantuan fire giant. Sonic and Shahra freeze time to escape (although they later return to finish him off) instead of confronting the overwhelmingly powerful Ifrit. Ali Baba thinks that they should find his friend, the wise Sinbad, to help them defeat the Ifrit. Sonic and Shahra go to the Levitated Ruin and free a trapped Sinbad (the Arabian Nights counterpart of Knuckles the Echidna) who tells them that the best way to destroy the Ifrit is to, "splash some water on him". Sonic sarcastically replies and causes a feud between the two characters, thus emulating their real-world relationship. Ali Baba forces his way between the two to stop the fighting and says the only problem with that plan was getting enough water to stop such a large fire golem. Sinbad replies that he was getting to that part before he was interrupted, saying that they would be able to get enough water to beat the Ifrit with the Water Blue Ring, a ring Sinbad used to control storms before it was stolen by pirates. Sonic heads off to Pirate Storm to confront the pirates and take back the Water Blue Ring. After defeating the world's boss and acquiring the ring, Shahra hands Sonic a mysterious relic and tells him to use it if he has no choice. The pair then return to the Evil Foundry to face off with the Ifrit.
After a challenging battle, Sonic defeats the Ifrit but finds a time bomb. They escape and throw the time bomb into the air. It explodes, revealing the fire ring. As Sonic takes up the ring, he realizes the cause of the Ifrit Golem's anger. The seven World Rings contain various emotions, with this particular ring containing rage. Sonic then goes to the Skeleton Dome and meets the undead King Solomon, who has been turned into a floating skull by Erazor Djinn. Sonic agrees to confront the resurrected forty thieves and get the king his original body back. King Solomon then tells Sonic that he must face Erazor in his lair, knowing that Erazor is said to be a Genie of the Lamp, just like Shahra is a Genie of the Ring. King Solomon is still weary and senses death approaching. Sonic then goes to the final world, Night Palace, where Erazor resides. After several challenging obstacles, Sonic finds and confronts Erazor Djinn. It is the player's decision whether he wants to go on to find the last world Ring or face Erazor. Sonic says the last world ring seems to be "sealed with sadness" and Shahra reveals he is the genie from Aladdin and the Magic Lamp. After a heated battle, Erazor is defeated by Sonic. However, before he can be completely defeated, he escapes through a door and proceeds to lock it. The lock can only be opened by the seven World Rings, so Sonic returns to the different worlds of the Arabian Nights to locate the remaining Rings.
After Sonic collects the rings, the door opens and a "Last Chapter" is revealed as another mission under Night Palace. In the last story, Erazor convinces Shahra to give him the seven World Rings that she and Sonic have collected. Shahra complies and reveals that she and Erazor were once together and that she wants to be back with him. Sonic rubs his ring and commands Shahra to do what she "feels is right", causing her mind to crack at the two different choices she wants to make. Erazor tries to sacrifice Sonic, the collector of the World Rings, in order to gain their full power and gain the abilities of the creator. However, Shahra blocks Erazor's blade and is struck down in Sonic's place. As Shahra dies in his arms, Sonic makes one final wish for Shahra to grant - asking her to "not die, and for things to go back to the way they were." Although she does not have the power to grant the wish, the mysterious relic she gave to Sonic returns to its original state. Soon after, Erazor absorbs the power of the seven World Rings and transforms into Alf Layla wa-Layla, now intending to destroy the world and reality of the Arabian Nights and recreate it in his own image before moving on to Sonic's world. However, his transformation is not complete as he is required to sacrifice and absorb Sonic, the collector of the Rings. Suddenly, three of the World Rings (Sadness, Rage, and Hate, which were his feelings at the time) infuse with Sonic, causing him to undergo a radical transformation into a new form: Darkspine Sonic.
After a vicious battle, Sonic destroys Alf Layla wa-Layla and Erazor is returned to his original state as well as Sonic. Sonic, now controlling Erazor with his lamp, wishes to bring Shahra back to life, return the world back to normal, and for Erazor to be sealed away in the lamp forever. Erazor is forced by the power of the lamp to grant Sonic's wishes, even though he expresses a denial to do so, after which, he is sealed in his lamp forever (during the credits, there appears to be a shot of Sonic throwing Erazor's lamp into the lava pit from which the Ifrit Golem emerges from). Shahra, though back to life, is still overcome with grief from her earlier betrayal of Sonic. Sonic understands this and wishes for mountains of handkerchiefs so she can cry for as long as she needs to, touchingly alluding to the start of the story.
After the credits roll, Shahra, as the narrator, says that Sonic ran endlessly until he found his way back to his own world. He is said to have had many adventures along the way, some with Ali Baba and Sinbad, but Shahra states that these stories are "for another time." She then bids a touching farewell to Sonic, the "Legendary Hedgehog". After the second credits roll, a cutscene is seen where the Arabian Nights book shows the beginning of "Aladdin and the Magic Lamp," which is followed by the title changing into "Sonic and the Secret Rings."
Enemies scattered throughout the game are described as "spirits." Each enemy has different attributes depending on their predominant color. Purple and green enemies are normal enemies and have no special attributes while red enemies can spew fire in a rotary or linear motion. To defeat some of these enemies, Sonic will need to make use of some of the 104 skills that will be available to him as the game progresses.
Sonic has special moves that can be both customized and combined to suit certain situations. Sonic can use some of 104 new skills throughout each of the stages in this game. With special skills equipped, Sonic can perform new moves, his existing moves are improved, and certain effects are bestowed. For instance, one defensive move enables Sonic to, upon sustaining damage, lose only ten rings instead of the usual twenty. Another increases the range of his homing attack, and a third grants him the ability to back flip. A fourth grants him a Soul Gauge with which to perform super moves. There is also an Experience Point and leveling system, in which the player's score, collected Fire Souls and some skills contribute towards increasing the player's level. Leveling up grants the player more points with which to equip skills, a higher cap on the number of rings you can hold, and an increased Soul Gauge. Players have to, before selecting a stage, decide which skills would be best suited for the respective mission and equip certain skills over others. Since there are so many skills, players may customize one of the four "Skill Rings" available, so they do not have to select all the skills they need each time they enter a new level.
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