Sonic Labyrinth is an action and puzzle game with pinball elements. It is presented in an isometric perspective, and has been compared to Marble Madness (1984). Series villain Dr. Robotnik has tricked Sonic the Hedgehog into wearing special shoes designed to rob him of his speed, so Sonic must collect the Chaos Emeralds to release the shoes from his feet.

The player controls Sonic, navigating him through maze-like stages filled with enemies and obstacles that hinder his path. Sonic walks uncharacteristically slowly, but can roll into a ball and dash across the levels to take out enemies and avoid danger. This spin dash move can be charged for extra speed and damage. Sonic must collect three keys in each stage and bring them to the goal to advance to the next level. Sometimes the keys may be hidden within enemies. The game has four zones, each containing three stages. After each set of three stages, there is a bonus round of collecting rings and a boss battle. Collecting 100 rings in the bonus round will net the player an extra life. A time attack mode is also available.