There are 5 main difficulty settings (4 available in singleplayer), although modules may add their own twists. See Game Options for how these are configured.

These only affect singleplayer difficulty, or if hosting a game yourself. Servers set the difficulty when you join them. Of course the server needs to set a relevant value in it's settings.tml file.

The default difficulty is Easy. It is recommended for more experienced players to play on D&D Hardcore Rules which allows critical hits and attacks of opportunity.

Just PCs?

What are PCs? In regards to the game engine it is likely any henchmen of the PCs are affected as if they were PCs, while anything else is an NPC. Certainly that is how the scripted changes to effects in nw_i0_spells.nss work.

Very Easy

Note "Very Easy" is listed in the dialog.tlk file but not in game, and is GAME_DIFFICUTLY_VERY_EASY but only available as a server difficulty or changable in DM mode. It likely provides a quick way to have a deathless "story mode" time in the module. Note the spelling mistakes and "not quite right" sentences in the below table are directly from the dialog.tlk file.

Difficulty Settings

Difficulty LevelPvPCritical HitsAttacks of OpportunityPC damageNPC DamageDeathSleepDomination and CharmHold, Paralyze and StunConfusionFear
Very Easy

Single Player: No PvP (Fireballs and other area effect spells will not harm party members)

Multi Player: As per server setting

No critical hits on PCs

No attacks of opportunity on players using ranged weapons

No attacks of opportunity on players using potions

PC does a minimum of 100% of damageNPC does a maximum 25% of damagePlayers cannot dieSleep effectss on players last for a short durationDomination and Charm effects will daze a playerHold, Paralyze and Stun effects will daze a playerConfusion effects will daze a playerFears effects will cause a -2 penalty to hit
Easy

Single Player: No PvP (Fireballs and other area effect spells will not harm party members)

Multi Player: As per server setting

No critical hits on PCs

No attacks of opportunity on players using ranged weapons

No attacks of opportunity on players using potions

PC does a minimum of 50% of damageNPC does a maximum 50% of damagePlayers can dieSleep effects on players last for a short durationDomination and Charm effects on players cause dazeHold, Paralyze and Stun effects will daze a playerConfusion effects on players function normallyFears effects will cause a -4 penalty to hit
Normal

Single Player: No PvP (Fireballs and other area effect spells will not harm party members)

Multi Player: As per server setting

No critical hits on PCs

No attacks of opportunity on players using ranged weapons

No attacks of opportunity on players using potions

PC damages normallyNPC damages normallyPlayers can dieSleep effects on players last for a short durationDomination and Charm effects on players cause dazeHold, Paralyze and Stun effects on players last for a short durationConfusion effects on players function normallyFears effects on players function normally
D&D Hardcore Rules

Single Player: Full PvP (Fireballs and other area effect spells will hurt party members)

Multi Player: As per server setting

Critical hits on PCs

Attacks of opportunity on players using ranged weapons

Attacks of opportunity on players using potions

PC damages normallyNPC damages normallyPlayers can dieSleep effects on players function normallyDomination and Charm effects on players cause dazeHold, Paralyze and Stun effects on players function normallyConfusion effects on players function normallyFears effects on players function normally
Very Difficult

Single Player: Full PvP (Fireballs and other area effect spells will hurt party members)

Multi Player: As per server setting

Critical hits on PCs

Attacks of opportunity on players using ranged weapons

Attacks of opportunity on players using potions

PC damages normallyNPC's do 200% damagePlayers can dieSleep effects on players function normallyDomination and Charm effects on players cause dazeHold, Paralyze and Stun effects on players function normallyConfusion effects on players function normallyFears effects on players function normally

Scripted Versus Engine Changes

Note some of the above effects are not due to engine changes but are from script changes.

Engine Changes

Scripted Changes

Other Scripted Changes Not In Table

These instances in scripts of difficulty settings being checked outside of the above table notes:

Removed Difficulty Options

Previous to Hordes of the Underdark and epic levels there was an option called Massive Damage - where you would have a DC 15 fortitude save to not die if you took 50 points of damage at once, would be only on Hardcore and Very Difficult. Interestingly the game still defines the hardcoded string (2385) and it could be coded back in by using OnDamage events on creatures.