Copied from the original Diablo wikipedia page, because they explain it twenty times better than I would.
The settings of Diablo include Heaven and Hell as real, physical places. Angels and Demons waged a war for centuries, until the ascension of man. Heaven and Hell each tried to compel man to join their cause. A treacherous mutiny forced the 3 Lords of Hell—including Diablo himself—into the world of humanity, where they sowed chaos, distrust and hatred. With the help of Archangel Tyrael a group of magi trapped the 3 Lords of Hell in soulstones. Diablo's soulstone was buried deep in the earth and a monastery was built over the site to safeguard the entrance.
Generations passed and the purpose of the monastery was forgotten. A small town named Tristram sprang up next to the monastery's ruins. A religious king named Leoric then claimed the monastery and rebuilt it as a cathedral for his seat of power. Diablo entered the nightmares of the archbishop Lazarus and lured him to the soulstone, where he destroyed the stone. Diablo possessed first the king, who sent all his knights and priests to battle against peaceful kingdoms, and then possessed the king's son, filling the caves and catacombs beneath the cathedral with creatures formed from the young boy's nightmares.
Tristram became a town of fear and horror, where people were abducted in the night. With no king, no law, and no army left to defend them, many villagers fled. Dark rumors permeated the country, and would-be heroes and demon-hunters came to Tristram and entered the cathedral, but none have been seen again.
