During a fight on one of Dr. Eggman's spaceships, Sonic becomes caught in a nefarious trap! Eggman uses a device to extract the Chaos Emeralds' power, and inverts it, sending a blast to the planet below which shatters Earth into pieces, reawakening a being called Dark Gaia. With Sonic no longer of use to him, Dr. Eggman quickly jettisons him and the now dead Chaos Emeralds into space, where he crash-lands on the Earth below.

Sonic Unleashed is a combination of two types of games: during daytime stages, Sonic is his normal self, with intense speed-based levels that are reminiscent of his original games. When night falls, Sonic transforms into a monstrous, yet powerful 'Werehog' with stretchy arms. In nighttime stages, he must brawl his way through 3D environments crawling with Dark Gaia's minions.

As players defeat enemies in both types of stages, they earn experience which allows them to level both Sonic's normal and Werehog abilities, such as speed, strength, life, combat and so on. There are also 3D hub worlds to be explored during both day and night, with different events occurring in each. Sonic can help the townsfolk with tasks for items and rewards, or purchase items from shops using the rings he's collected throughout the stages.

Sonic's buddy Tails also makes an appearance during stages where they fly his plane. During these stages, you must press the appropriate button sequences as they appear to shoot down any oncoming enemies.