The gameplay is simple: You press A to collect "drops" of the same color, and press B to release them. Match three or more of the same color to pop them and send more over to your opponent. The player can also press the C button to make more drops appear on your own side, in order to perform faster and longer comboes. The first to have their drops touch the bottom of the screen loses, although players can also win by fulfilling a quota listed in the middle of the screen. There are a number of characters to select from, based off of the 22 Tarot figure cards, and four basic types of drops to pop again based on the four "suits" of tarot (the stave, the sword, the cup, and the coin, in this case appearing as stars.)
There are several hidden characters in the game who are not default selectable: Moon, Hermit, Temperance, Hanged Man, Tower, and Fortune, and Strength's father (the original Strength from 2, who has been replaced by his daughter in this game.) There is also one character not based on any tarot card, the Black Pierrot. He is a hidden character who is only encountered if the player is playing on high difficulty and is defeating opponents very quickly. Unlike the other hidden characters, Black Pierrot is not selectable. Each character has a different pattern which appears on your opponent's side in versus or challenge mode. In addition, each character has a different "attack" pattern which occurs when you clear a sequential number of drops. For example, Fool pushes all drops down evenly as an "attacK", whereas Death and Tower push drops down on either side of the opponent's playing area. Some characters also generate ice blocks with a higher frequency (ex., Empress) or require less in the way of comboes to push the opponent's side down (Tower).
The game takes place in "Magical Land", where the various characters are competing over a jar of magical drops which is rumoured to grant wishes. Each character makes a different (generally silly) wish in their ending (For example, Judgement wishes to be a boy, but then is horrified when she appears in a bath house and Emperor comes on to "him")
There are three modes:
- Survival mode, in which you are given a constant stream of balloons to pop.
- Story mode, in which you fight a series of opponents culminating in Fortune. This is the only mode in which an opponent can burst in.
- And Magical Journey/Sugoroku mode, in which you must go through a series of puzzles, in board-game fashion. The final opponent here is always Empress.
: In addition to the four basic drop types, there are a number of special drops. Three special drops: the suit drops, the ice drops, and the rainbow drops appear in versus mode. All others appear exclusively in the other modes of play.
- Suit drops: These resemble one of the basic four suits (ex., a cup) but instead of being a sphere appear coin-like, and rotate slightly. If one of these drops is popped, it clears all drops of the corresponding colour on your side.
- Ice drops: Some drops are frozen when they first appear. There are two types, "blank" ice drops and coloured. To unfreeze an ice drop, perform a normal combo adjacent to one (I.E., pop three drops while they touch an ice drop) Coloured drops, when unfrozen, result in the colour they were while frozen, whereas "blank" drops take on the colour of the drops you popped near them. When one ice drop is unfrozen, all others on your side are also unfrozen.
- Rainbow drops: These drops resemble shining jewels. When you complete a combo adjacent to them, all drops of that colour are cleared from your side.
- Bubble drops: These drops are pointless and serve only to get in your way. Pop them by chucking another drop at them.
- Directional drops: These drops appear to have arrows pointing in one of four directions on them. When you perform a combo adjacent to them, they destroy all drops in a line based on the direction the arrow is pointing.
- Bomb drops: These drops look like bombs with a number on them. The player must perform a combo corresponding to the number on the bomb anywhere on the screen to destroy them.
Magical Drop III has been ported to many consoles; the balance has been radically re-worked in some versions (notably the Saturn and PS1 versions) and additional modes of play have been added to some.