Looking at the Norse Nine Worlds,* four seem to clearly fall into the realm of the Underworld:
- Svartalfheim: Home of the Black Elves
- Hel: Home of the Dead
- Niflheim: Home of the Mists
- Muspelheim: Home of Fire
Svartalfheim is identified with the dwarves explicitly in Norse mythology. We might also stick the gnomes here, as relatives of the dwarves. But all the other creatures that traditionally have a connection with the elves, that fit in an Underworld setting better than a higher concept of Elfland, arguably belong here: bugbears, goblins, hobgoblins, kobolds, and orcs. These traditional enemies of dwarves and gnomes suggest an underground realm that is full of conflict and warfare.
Hel is the realm of the dead who are not great heroes. It is also where one would expect the undead to originate and generally dwell.
Niflheim is wet and cold, a realm of mists. Here the white dragon, water elemental, and frost salamander would best dwell. Though there is a an over-world location for giants, the frost giants would also fit well here.
Muspelheim, the realm of flame, is the natural home for fire giants, efreet, fire elementals, red dragons, hell hounds, and fire salamanders.
What does an Underworld divided into such regions suggest? For one, the further down one goes in the Underworld, the worse things get. Svartalfheim, one might be tempted to call it the Underdark, the Feydark, or Underfaerie is a realm that is dominated by evil humanoids, but still has dwarves and gnomes in it (although, the dwarves are more morally ambiguous or even evil in Norse literature than they are in traditional high fantasy). Hel is the realm of the mass of the dead, but also of the evil undead. To avoid later associations with Hell, one might rename it the Kingdom of Death or the Deadlands or the Hollow or the Valley of the Shadow of Death or some such. It could be ruled over by a Queen like Hela or Persephone. Niflheim sounds like an elemental plane of water, but the best that one can hope for in sea with lands and mountains of ice, covered by mists, is moral neutrality: the giants and dragons are evil. Muspelheim is the elemental plane of fire, where again the neutral elementals seem outnumbered by very evil races. Passages between these domains would perhaps be by means of wells, which were significant in Norse mythology, or by means of the roots of Yggdrasil, itself.
A megadungeon complex might well cross through multiple of these Underworld domains, which hardy adventurers would brave as they trace surface evils to their sources or seek treasures of the Underworld, but Angela's comment on part I brings to mind another possibility that has often been overlooked -- very strangely given its prominence in the myths. In games that have allowed the resurrection of characters, this has often been the availability and affordability of the spell for the raising of player characters of major NPCs. But what if the spell was just one component that was necessary? What if the party had to make a trip into the realm of Death to reunite body and soul with the spell? Keep in mind that the god Pluto and Plutus, or the god of wealth, were often identified as the same god. This would keep resurrection from being too common in game and also work character death and resurrection into story in a more direct way.
An initial identification of four regions of the Underworld in this way marks the beginning of the (sub)creation of a distinctive campaign setting, suggestive of further elements, such as the purpose of quests and the way that certain magic works.
*There is no universal system of imagining the arrangement of these worlds in Norse literature. This one makes sense to me. There might be an argument for locating the realm of the giants (Jotunheim) as a whole in the Underworld, but it does not make sense to me to put giants of hill, stone, cloud, and storm there (not to mention ogres and trolls), as much as to put the home of the frost giants in Niflheim, just as the fire giants are in Muspelheim.