Space Dungeon is a shooter game in which the player controls a spaceship equipped with a laser cannon, which can fire a pulsing, solid beam in any of eight directions.
Each level of Space Dungeon consists of 36 rooms arranged in a six-by-six grid. Rooms are connected by open doorways of various sizes. One room in each level is the entrance, where the player begins, and another is the "Collect Bonus" room. Other rooms can contain laser defenses, hostile aliens, or various pieces of treasure. The goal in each level is to navigate using an automap to the room containing the "Collect Bonus" area, while visiting as many rooms and collecting as much treasure as possible along the way.
Higher scores are awarded for exiting each level with more treasures. A 10,000-point bonus is awarded if the player visits every single room on the level, whether or not all treasures on the level have been collected. An extra ship is also awarded to the player every time they score 10,000 points.
If the player's ship collides with an enemy or any of their spore shots before reaching the "Collect Bonus" cube, all collected treasure is dropped in the room where the ship was destroyed. This room is designated on the map by an "X". The player may return to the same room to retrieve their treasure, but if they are destroyed again before retrieving it, all dropped items will be lost.
A multiplayer mode is also available in which players take turns after one player loses a ship.