Sanctuary is the physical world where all the Diablo games take place. It is known to be disconnected from the High Heavens and the Burning Hells, as in they are in another realm.
The story of how the Diablo Sanctuary came into existence is an interesting one. The angels and demons had been locked in a battle known as the Great Conflict for many years, and some started to get tired of this. It was the archangel and Council member Inarius that partnered with the demon Lilith (daughter of Mephisto) and used the power of the Worldstone to create Sanctuary (hence the name).
Inarius also used the Worldstone to keep Sanctuary hidden from both the angels and the demons. As things prospered on the Diablo Sanctuary, the angels and demons living there created the first generation of humans known as the Nephalem. Inarius and Lilith also had a child of their own called Rathma.
Inarius and Lilith had different plans for the Nephalem however, While Inarius wanted them to worship him and further boost his ego, Lilith wanted to use them to build her own personal army. To this end, Lilith murdered all the angels and demons living on the Diablo Sanctuary save for her loved one Inarius, which didn't approve at all of this decision.
To this end, Inarius altered the Worldstone so that it would weaken the Nephalem over each generation so he could more easily control them.
At some stage Mephisto found out about this new world. Instead of turning it into another battleground however, he decided it would be better if he could subvert the Nephalem over to his cause to help turn the tide against the angels. He did this by sending his son Lucion into the Diablo Sanctuary to create the Triune church. Inarius responded to this by creating his own religion, called the Cathedral of Light.
When the angels found out about Sancturay, they thought it was an abomination and ordered it's destruction. They assigned Tyreal to carry out this mission using the Heavenly Host. Before he could complete his goal however, Mephisto managed to strike a deal with the angels. Instead of destroying Sanctuary, he convinced them to instead offer both angels and demons a fair share of the Nephalem's power, in exchange for Inarius.
After this event, the Council wiped the memory of all the humans so they would never know who created them, or who almost killed them.
As a trivial note, the only recurring event known to happen in the Diablo Sanctuary is known the Night of Souls, where the dead return to life temporarily.